Pricing in General Insurance

93

6

The Scientic Basis for Pricing: Risk Loss Models

and the Frequency/Severity Risk Costing Process

In Chapter 2, we looked at an extremely simplied, and old-fashioned, way of doing pricing,

by considering the total losses incurred in a policy over the years. By a series of enhance-

ments, this method can actually be developed to the point where it actually provides a

reasonable rst-cut indication of what the correct price may be, provided the loss experi-

ence is sufcient: this is the so-called burning cost analysis, which will be illustrated in

Chapter 11. However, to put pricing on a sound scientic basis, we need to understand and

model ...