Pricing in General Insurance

xxiii

Preface

Most people with some interest in the history of science know that in 1903, Albert Einstein,

unable to nd a job at the university, started working as an ‘assistant examiner’ in the

patent ofce of Berne, where he worked efciently enough to be able also to produce four

papers, one on Brownian motion (now a standard topic in the actuarial profession exams

on derivatives) and three on relativity theory and quantum mechanics (not on the syl-

labus). According to one biographer (Isaacson 2007), an opportunity had also arisen for

Einstein to work in an insurance ofce, but he hastily turned that down arguing that that

would have meant 8 hours a day of ‘mindless drudgery’. Details on the exact job descrip-

tion for the position are not available, but since that was in 1903, we can rule out the pos-

sibility that Einstein was offered a position as a pricing actuary in general insurance. And

apart from the historical impossibility (actuaries were rst involved in general insurance

around 1909 in the United States, to deal with workers’ compensation insurance), the job

of the pricing actuary in general insurance is way too exciting – contrary perhaps to public

perception – to be described as mindless drudgery: pricing risk means understanding risk

and understanding risk means understanding (to some extent) how the world works (which is

after all what Einstein was after): to give but a very simple example, pricing a portfolio of

properties of a company requires some understanding of what that company does (is it

producing gunpowder or hosting data centres?) and what perils (natural and man-made)

these properties are exposed to in the territories the company operates in.

This book is based on my experience as both a practitioner and a part-time lecturer at

Cass Business School in London. It was written to communicate some of the excitement

of working in this profession and to serve the fast-expanding community of actuaries

involved in general insurance and especially in pricing. It comes at a time when this rela-

tively new discipline is coming of age and pricing techniques are slowly crystallising into

industry standards: the collective risk model is widely used to estimate the distribution of

future total losses for a risk; extreme value theory is increasingly used to model large losses;

generalised linear modelling is the accepted tool to model large portfolios with a signicant

number of rating factors – to name but a few of these techniques.

This book was written by a practitioner with actuarial students specialising in general

insurance* and other practitioners in mind, and its aim is therefore not foundational (such

as is, for example, the excellent Loss Models: from Data to Decisions by Klugman et al. 2008)

but practical. As a matter of fact, I have tried to keep constantly in mind Jerome K. Jerome’s

wry remark on the lack of practicality of foreign language teaching in British schools dur-

ing his (Victorian) times: ‘No doubt [students] could repeat a goodly number of irregular

verbs by heart; only, as a matter of fact, few foreigners care to listen to their own irregu-

lar verbs recited by young Englishmen’ (Jerome 1900). This book, therefore, rarely dwells

on the more abstract points about pricing, mathematical denitions, and proofs (which

might be thought of as the irregular verbs of our profession) beyond the bare minimum

needed to develop an intuition of the underlying ideas and enable execution – rather, it is

rich in step-by-step methods to deal concretely with specic situations and in worked-out

examples and case studies.

*

Specically, the contents of this book are based on the syllabus for the ST8 exam (‘General Insurance Pricing’)

of the Actuarial Profession in the United Kingdom and India, with additional material.