I wholeheartedly agree with the idea that the model used for pricing should
be consistent with that used for profitability analysis.
Brad Gile
Meyers, Glenn G. wrote:
> I would like to comment on the allocation of surplus discussion.
>
> First - I hope that most of us would agree that the allocation of
> surplus is a pricing tool, and is not directly connected to the safety
> of the insurance policy that is "supported" by the allocated surplus.
> To quote Chuck McClenehan "A monoline auto company with $100 million of
> surplus is not the same as a multiline company with $100 million of
> surplus allocated to its auto line."
>
> Second - The real purpose of allocating surplus is to calculate a risk
> load. Conversely, you can allocate surplus in proportion to your
> favorite risk load. That is to say allocating surplus (as it is used)
> is equivalent to a risk load formula.
>
> The difference between the approaches is that pricing by allocating
> surplus is a "top-down" method and the risk load approach is a
> "bottom-up" method. There are probably some insights that the surplus
> allocaters can gain from looking at risk loads.
>
> I like to view risk load as the cost of marginal surplus. I offer three
> ideas related to some of the knottier problems involved in allocating
> surplus.
>
> 1. You have to hold surplus longer to support long tailed lines.
> Therefore the risk load should depend (among other things) on a factor
> times the duration of the losses - - at least as a first approximation.
>
> 2. Marginal surplus methods can account for correlations between
> lines. Suppose, for example, you assume that the total needed surplus
> is a function of the variance. If Y is the random loss of the policy in
> question and X the random loss for the rest of the insurer's business,
> then the marginal variance is Var[Y] + 2Cov[X,Y].
> You can also treat correlations between losses and
> assets by marginal methods.
>
> 3. You can treat "surplus substitutes", such as reinsurance, very
> much the same as surplus. For example, you can calculate the marginal
> cost of reinsurance.
>
> I suspect there are some things that the surplus allocaters can tell us
> riskies.
>
> Here are some papers for those who want more information on marginal
> surplus risk loads.
>
> Rodney Kreps - "Reinsurer Risk Loads from Marginal Surplus Requirements"
> - 1990 PCAS
>
> Glenn Meyers - "The Competitive Market Equilibrium Risk Load Formula for
> Catastrophe Ratemaking" 1996 PCAS. This is available on the CAS web
> site under "Publications"
>
>
> Glenn Meyers
> Insurance Services Office, Inc.
> Internet: gmeyers@iso.com
> Voice:(212) 898-5938
> Fax: (212) 898-6060
>
> Visit the CAS Web Site at http://www.casact.org
> ===============================================
> To subscribe or unsubscribe from CASNET:
> Send an e-mail to caslists@lists.casact.org
> Type in the body join casnet to subscribe
> or leave casnet to unsubscribe.
Visit the CAS Web Site at http://www.casact.org
===============================================
To subscribe or unsubscribe from CASNET:
Send an e-mail to caslists@lists.casact.org
Type in the body join casnet to subscribe
or leave casnet to unsubscribe.