The Concentration Charge: Reflecting Catastrophe Exposure Accumulation in Rates

Diversification of exposure concentration means geographical balancing amongst capacity providers - insurers, reinsurers, or capital market participants. But how to diversify those exposures is still unsettled. Efforts to this point have focused on balancing the exposures which have already been written by insurers00via catastrophe reinsurance (regular or securitized), several proposed catastrophe indices, even direct exposure exchanges. This paper proposes an alternative approach: exposure balancing at the point of sale using an insurance pricing structure which reflects the insurer's exposure level or "portfolio state"-what can be called portfolio state dependent pricing. Instead of one set of filed loss costs and loss cost multipliers, insurers would quote a manual rate which included a surcharge which reflects their exposure level in the area where the potential insured is located. If all carriers were required to quote on a similar basis had similar loss costs and multipliers, a potential insured's desire to be charged the lowest premium would lead them to choose the carrier who was least exposed in their area.