Pricing in General Insurance

143Burning Cost Analysis

The arguments for whether the weighted or unweighted average is likely to be more

appropriate are, briey, as follows:

i. These are normally quite similar if the exposure is roughly constant, but diverge

when – as is the case here – the exposure changes a lot over the years and we have

some very large contributions from the earliest years.

ii. The weighted average is normally a better measure for the risk than the

unweighted average because it gives more weight to those years that have a larger

exposure and for which, therefore, the total loss estimate has more credibility.

However, looking at the unweighted quantities ...