An Exposure Rating Approach to Pricing Property Excess-of-Loss Reinsurance

Included in the 1963 Proceedings is the paper, "Rating by Layer of Insurance," by Ruth E. Salzmann. In her paper, Salzmann examines the relationship between homeowners fire losses and the corresponding amount of insurance. Using 1960 accident year data from the Insurance Company of North America (INA), each homeowners fire claim was expressed as a percentage of the amount of insurance on the policy affording the coverage. An accumulated loss cost distribution by percentage of insured value was then developed. These distributions can be (and indeed still are) used to exposure rate property excess-of-loss reinsurance. In order to determine whether the relationship between size of loss and amount of insurance is a stable one over time, Salzmann’s methodology has been applied to a more current set of data (Hartford Insurance Group homeowners losses for accident years 1984-1988). Any changes in this relationship over time would have obvious implications for any reinsurer currently using the Salzmann Tables to exposure rate property excess-of-loss reinsurance. Salzmann’s methodology has also been applied to The Hartford’s small commercial property book of business in order to determine whether the commercial property relationships of loss size to amount of insurance differ from those of homeowners. Reinsurance Research - Pricing/Contract Design