In the reinsurance market, the same risk can receive price quotes from multiple insurers. Some insurers will quote low and others will quote high, due to errors in cost estimation and/or different market strategies. Usually the lowest price bidder will get the business. There is a good chance that the...
It is widely accepted that capital markets do not demand a premium for risk that investors can diversify. On the other hand, insurers' and banks' pricing models frequently include an allowance for total risk, diversifiable or not. Why then do competitive product markets not eliminate these pricing margins? The paper...
The aim of this paper is to understand Generalized Linear Models GLMs and use them to analyze insurance data. It is divided into three sections. Section 1 provides a foundation for the statistical theory and gives illustrative examples and intuitive explanations which clarify the theory. Section 2 provides practical insights...
The developments have created an increased interest among companies in developing formalized Enterprise Risk Management ERM policies. Implicit in such an ERM policy is some statement of acceptable and unacceptable tradeoffs, or risk preferences. Since risk preferences will be a central part of the ERM policy, they should be explicitly...
The work by Ruhm, Mango and Kreps, known as the RMK Framework, has proven to be a great advance in the theory of risk. The RMK Framework is a way of viewing an allocation problem that focuses on the scenarios of greatest concern and the probability that those scenarios take...
Reinsurers typically face two problems when they want to use insurer claim severity experience to experience rate their liability excess of loss treaties. First, the claim severity data has insufficient volume to make credible projections of excess layer costs. Second, the data they do receive is not fully developed. This...
This paper is aimed at the practicing actuary to introduce the theory of extreme values and a financial framework to price excess-of-loss reinsurance treaties. It introduces the reader to extreme value theory via the classical central limit theorem. Two key results in extreme value theory are presented and illustrated with...
In classification ratemaking, the multiplicative and additive models derived by actuaries are based on two common methods; minimum bias and maximum likelihood. These models are already considered as established and standard, particularly in automobile and general liability insurance. This paper aims to identify the relationship between both methods by rewriting...
A very simple method is shown for the estimation of the catastrophe loss exceedance curve of a sub-portfolio, when the information available is limited to a total portfolio catastrophe loss exceedance curve, and just enough information about the sub-portfolio to make reasonable selection for two parameters; relative frequency and relative...
Risk measurement provides fundamental support to decision making within the insurance industry. In spite of this, the limitations of the common measures are not well appreciated and there is little non-specialist awareness of the more powerful techniques. However, it is fragmented and is not always in a form that is...
Data Warehouses and Data Marts increase the power and efficiency of an Insurance company's Business Intelligence capabilities by supporting queries, OLAP and data mining. Web enabling of these applications makes them more user-friendly. The potential benefits greatly outweigh the costs. Data warehouse/data mart implementation streamlines information delivery for decision support...
This paper argues that obsolete rating architecture is a cause of decades of documented poor financial performance of residential property insurance products. Improving rating efficiency and equity through modernization of rating and statistical plans is critical to the continued viability of the products. The transition from indivisible to divisible base...
Although captives represent a significant part of the insurance market, there is relatively little information on the subject in the actuarial literature. This paper describes ratemaking techniques and approaches that can be used for captives and other alternative market vehicles. To put the discussion in context, the paper begins with...
This paper proposes a flexible and comprehensive approach for minimum bias models - "Generalized Minimum Bias Models"GMBM. Unlike the Generalized Linear Models GLMs that require the exponential family distribution assumption of response variables, the GMBM approach relaxes the distribution assumption. In addition, due to its model selection flexibility, it believes...
Because the many potential pitfalls in evaluating tort reforms, the actuary will want to evaluate any proposed reform carefully, and consider the many issues involved. Actuaries who evaluate the expected costs impact of proposed malpractice tort reforms should be aware of the issues underlying all ten pitfalls. Some of these...
This paper provides an overview of the newly developing Inter national Accounting Standards IAS or IFRS for Insurance, with emphasis on issues impacting poverty and casualty insurers and the reserving work that actuaries do to support that. Those standards will emerge in two phases, with the more challenging actuarial issues...
While the majority of statements of actuarial opinion regarding loss reserves are relatively straightforward, occasionally the actuary is confronted with atypical situations. These situations may include financially distressed or insolvent companies, ceded reinsurance collectibility issues, significant influence of a small group of claims, items requiring the disclosure of a significant...
The workers' compensation tail largely consists of the medical component of permanent disability claims MPD. This paper presents an analysis of medical payments based on 160,000 permanently disabled claimants - for accident years 1926-2002. It introduces a method for utilizing incremental payment data prior to the standard triangle to extend...
The financial methods have emerged as the dominant approach for establishing insurance profit loadings. Financial theory suggests that prices should reflect systematic risk only, with no reward for diversifiable risk. This principle is applied to the pricing of insurance exposures actively traded in a secondary market. The resulting Systematic Risk...
A broad finance perspective on the essential elements of the value creation process in insurance is presented in this paper to promote a more conceptually inclusive framework for insurance financial analysis. External capital costs, often dealt with separately or as an afterthought, are introduced and integrated into the framework alongside...
