Pricing Insurance Risk: Theory And Practice

The goal of this book is to show the reader how, starting with a portfolio (collection) of insured risks, they can compute a reservation price (required premium) for the portfolio, and derive reservation prices for (i.e., allocate required premiums to) the components of the portfolio (regions, lines of business, etc.) in a defensible manner. Being able to do this, the reader can also, as a corollary, assess the performance of different lines, evaluate needed reinsurance, or optimize overall strategy.

Numerous innovative concepts are presented, among them: the use of two distinct risk measures--capitalization and pricing--in combination; analysis of pricing via thin layers or tranches, which leads to a new vision of how expected loss, risk margin, and capital are distributed across the spectrum of losses, and also to spectral risk measures for pricing; a financial perspective on thin layers to inform the design of spectral risk measures; concepts of consumption versus funding of capital, leading to the linear yield and leverage equivalent spectral risk measures; two complementary approaches to capital cost allocation.

Risk--its definition and measurement--is first addressed in generality. The pricing of a portfolio of risks is analyzed from a financial perspective and leads to spectral risk measures. Financial principles are further applied to designing specific spectral risk measures to meet specific criteria at the portfolio level. The application of spectral risk measures for pricing the individual risks in the portfolio then emerges naturally. Further sections address implementation within simulation models, optimization of risk transfer, and areas for further development.

The Casualty Actuarial Society is currently revising its exam syllabus for Part 9, which covers the same topics as this book. The authors are working with the relevant committee with the aim of having the book become the principle text for the exam. The CAS has moved from using papers to a more unified treatment, based on a single text, in their other exams, but Part 9 has yet to be updated. Approximately 400 people take Part 9 each year.