Pricing in General Insurance

101

7

Familiarise Yourself with the Risk

It is difcult to overemphasise the importance of familiarising oneself with the risk one

is trying to price before delving into the technicalities of pricing (Figure 7.1), and still it is

difcult to write something sufciently general about it. This is the phase of pricing that is

least susceptible to being automated, as it requires getting to know your client* (whether

you are the underwriter, a broker or a consultant) with a mind that is as open as possible.

There is no real prescription but what you want, in a nutshell, is to make sure that whilst

you eagerly apply what the underwriters and the brokers call with some complacency

‘your actuarial magic’ to the numbers you are provided with, you do not ignore the context

in which your client operates and the potential risks it faces.

It should also be emphasised that knowing your client well is not useful only for pric-

ing a particular risk, but it helps in identifying other insurance needs of the client and in

general (if you have an advisory role and not only a selling role) to advise on the overall

risk management strategy.

The questions that you may ask of a prospective client are different if you are pricing a

personal lines policy rather than a commercial lines/reinsurance policy and, in the case of

mainstream policies such as car insurance or home insurance, it may not seem necessary.

However, even in that case, you must ensure that you have a preliminary idea of what the

portfolio of individual risks looks like.

7.1 Things to Look Out for (Commercial Lines/Reinsurance)

In commercial lines and reinsurance, it is customary to look at each client individually,

although smaller clients might be treated in a streamlined fashion. Here are a number of

things you might want to consider before or whilst you are looking at the data related to

your client.

7.1.1 What Does the Client Do, That Is, What Is Its Business?

For an underwriter, this is important to know because the client’s risk prole will be

related to its business. For a broker, or a consultant, it will be important both for risk con-

siderations and because clients are distrustful of anybody who expects to give them advice

without knowing what they do in sufcient depth.

*

In this book, we will use the term ‘client’, ‘policyholder’ and ‘insured’ (or ‘reinsured’) quite interchangeably to

indicate the organisation, or the individual, who purchases an insurance (or reinsurance) product or inquires

about purchasing one.

102 Pricing in General Insurance

7.1.2 What Are the Client’s Main Locations and the Main Numbers

(Such as Number of Employees, Payroll and Turnover)?

This is obviously related to the client’s exposure to risk. The locations will affect the juris-

diction of their claims and whether they are likely to be affected by natural catastrophe,

terrorism and the like. The other ‘numbers’ are proportional to some of the risks and will

give you a rough idea of their insurance needs. Some of these numbers can be found in the

client’s nancial statements, which in turn can normally be found in their website under

the ‘Investors’ section.

7.1.3 Have There Been Any Notable Changes in the

Risk Profile of the Client over Time?

We have spoken informally of the risk prole in Chapter 1. The risk prole is anything

about a particular company or individual that is relevant to its level of risk. For an indi-

vidual who buys car insurance, factors such as age and type of car affect the individual’s

risk prole; for a company buying employers’ liability, the risk prole is determined by

such things as the type of work its employees do and their salaries; for an insurer buy-

ing property reinsurance, the risk prole is the type of property portfolio, such as veered

towards residential, commercial or industrial.

This will affect the degree to which past claims experience is a good guide to future

claims experience for the risk under consideration.

7.1.4 Have There Been Any Important Mergers/Acquisitionsor

Divestitures in the Company over the Years?

This is crucial because the risk proles of merging/parting companies are not necessarily

the same.

Claims data

(including

portfolio data)

Exposure data

Cover

data

Risk costing

(gross)

Risk costing

(ceded)

Risk costing subprocess

Capital modelling

Loading for capital/profit

Discounting for

investment income

Loading for other expenses:

• Underwriting expenses

• Claims management

• Reinsurance

• Overhead

• …

Commercial

considerations

and other constraints

Technical

premium

Premium

charged

 

Familiarise with

the risk

e Pricing Process (High Level)

FIGURE 7.1

The rst thing to do in a pricing exercise is to familiarise with the risk; that is, getting to know your client and

its industry (this comes from Figure 1.2).