The Competitive Market Equilibrium Risk Load Formula for Catastrophe Ratemaking

Insurance Services Office, Inc. (ISO) has adopted a new risk load formula which is to become effective with 1991advisory increased limits filings. This paper describes the underlying rationale of the new risk load formula. This formula differs from previous IS0 formulas in that: (I) it is derived from competitive market assumptions; and (2) it recognizes the risks faced by the insurer in estimating the price of its product: i.e., parameter uncertainty. After the derivation of the formula, the paper will discuss considerations to be made by the insurer when using the formula. These considerations include excess-of-loss reinsurance.