Effect of Severe Losses Years on Rates

wilsonchan18

Hi,

I understand that the Indem$ is a function of Production Guarantee and Actual Production and Insured Price.
May I know when having few years losses, why the Indem$ will goes up form the formula?

Or is it just a judgment that we believe there is a loss trend from the Random Variable on Actual Production, so we just increase IndemRt for pricing? cause if just looking from the formula, the loss trend wont actually impacting any of the PG or AP elements. Am I thinking correctly here?

Thanks and Warm Regards,
Wilson

graham

It's a general pricing concept that if an insured incurs losses and makes claims to the insurer, their future premium rates will go up. In the formulas, the quantity PremRt would go up if the insured makes loss claims and therefore Prem$ would go up too.

• Prem$ = PremRt x L$

The source text does not provide any examples for how to calculate PremRt but recall that PremRt depends on these variables:

• uncertainty margin
• balance-back factor
• individual discount/surcharge
• reinsurance load
• self-sustainability load

So if an insured makes claims, then one or more of these quantities would go up. They might get a higher surcharge for example.

wilsonchan18

I see, I can follow this rationale from the pricing perspective on directly the PremRt, but not the IndemRt. I totally agreed to your points, maybe insurer will tune up the uncertainty margin or even the individual surcharge to price more. Thanks Graham!