Pricing in General Insurance

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2

Insurance and Reinsurance Products

To learn how to do pricing, actuaries need have a good working knowledge of the prod-

ucts that they’ll have to price. There are several aspects to this: one aspect is the knowledge

of the risk underlying a product. For example, household insurance is an insurance product,

and to price household insurance, one needs to know that it protects against perils such

as re, ood or theft, and needs to know what the factors are that make one house riskier

than another.

Another aspect is the knowledge of the technicalities of the policy and how this affects the

risk. The most obvious elements to be considered are the coverage modiers, such as the

deductible and the limit. Of course, a motor insurance that pays only claims of more than

£500 is not the same as a policy that pays the full amount. As a pricing actuary, you need

to be able to quantify the effect of increasing or decreasing the deductible (or the limit).

Yet another aspect, which is quite wide, is the environment your business operates in. This

includes just about everything from the way the insurance market is regulated, to the par-

ticipants in the marketplace, to the general economy, to your own company.

In this chapter, we will look at the rst of these aspects: the products available and their

corresponding risks, and we will acquaint ourselves with the classes of business normally

underwritten by insurance companies, syndicates and others. We will deal with the other

aspects in Chapters 3 through 5.

2.1 Classification of General Insurance Products: General Ideas

There is not a natural or standard taxonomy of insurance products in the same way that,

for example, the phylogenetic nomenclature provides a natural taxonomy of animals (as

opposed to classifying animals by, e.g. size or territorial distribution or how funny they

look).

Insurance classication depends very much on the perspective from which we look at

insurance products, and there are therefore as many different classication systems as

there are legitimate perspectives. Regardless of which one is used, there are unsatisfactory

aspects to it: products that should be together are split and products that should be split

are brought together articially. As an example, should ‘aviation liability’ be classied

inthe same broad category of liability along with employers’ liability or with ‘hull insur-

ance’ based on the broad category of aviation?

In the rest of the chapter, we will look at a few different ways to classify insurance; many

more are possible. The ones that we have chosen to illustrate are among the most useful

and will also help us understand different aspects of today’s insurance world.