Risk-Based Premiums for Insurance Guaranty Funds

Insurance guaranty funds charge flat premium rates, normally a percentage of premiums. Flat premiums can encourage insurers to adopt high-risk strategies, a problem that can be avoided through the use of risk-based premiums. Risk-based premium formulas are developed for 3 cases: 1. an ongoing insurer with stochastic assets and liabilities, 2. an ongoing insurer also subject to jumps in liabilities (catastrophes), and 3. a policy cohort, where claims eventually run off to zero. All 3 models assume that: 1. the paths of assets and liabilities over time can be described by diffusion processes, 2. the value of the guaranty fund itself reflects only systematic risk, and 3. the guaranty fund is certain to pay its obligations. Premium estimates are provided and compared with actual guaranty fund assessment rates.