New Products-Uncertainty of Cost, Measurement and Control of Risks, and Implied Profit Martins

It is often the case that a company writing a new product will not be able to precisely estimate the cost of the product and will not fully understand some of the characteristics of the product. These aspects of a new product entail risks not found in a mature well understood insurance coverage. One purpose of this paper is to explore the risks in a practical manner and to measure the extent of the risk. A second objective of the paper is to investigate some of the ways the risk can be controlled. Finally, the preceding will be used to point to needed profit margins in writing new products. Much of the risk generated by writing a new product results from the accumulation of liabilities before the characteristics of the product reveal them as expressed in the loss emergence patterns. By the time loss development is well understood a company may have underwritten unrecognized liabilities that can threaten the company with financial rum. One of the hypotheses explored in the paper is that liabilities with longer emergence patterns can be more of a threat to the company than products with more rapid emergence-investment income generation not withstanding. This argues for higher target profit margins.