Pricing in General Insurance

153Burning Cost Analysis

system, such as airbags). Sometimes these two effects go in different directions

and therefore compensate each other to some extent. Because the burning cost

is performed on the aggregate losses, it is ill-suited to disentangling these two

effects.*

The effect of large losses. Large losses strongly affect the nal outcome of a burning cost

analysis:

• The inclusion of a large loss may skew not only the burning cost itself but also

affect the overall distribution, giving it a much fatter tail.

• The omission of a large loss may underestimate the burning cost and the tail

of the distribution.

• Removing a large loss from ...