Fundamentally, insurers only have two decisions to make about a piece of business: whether to underwrite it—since some risks are not worth taking—and how much premium to charge if they do.
Insurance Basics: The Insurer's Point of ViewWhat premium should an insurer charge for a new product? The answer involves no rocket science: no one knows!You accumulate as much data as you can, and then you make what engineers refer to as a SWAG: a Sophisticated Wild-A**ed Guess.
Insurance Basics: The Insurer's Point of ViewWhat premium should an insurer charge for a new product? The answer involves no rocket science: no one knows!You accumulate as much data as you can, and then you make what engineers refer to as a SWAG: a Sophisticated Wild-A**ed Guess.
If you don't think you can guess accurately enough, then you don't underwrite the new product. Since many "new" products are actually new versions of existing products; old product loss data can help, to some degree, to refine the accuracy of your initial guess. Even so, past performance does not necessarily predict the future very well, and in the insurance case of truly new products, you're on your own.
For a new product, then, the first factor to consider in selecting a premium is simply an educated guess on the part of the underwriter. This guess also encompasses the initial policy form, because trial lawyers are going to hunt for any loophole they can find in whatever insurance policy form you create, in order to win the claim settlement lottery (33% of litigated claim settlements go into an attorneys' pockets). As claim follows claim, the insurer will alter the policy form until it most clearly defines the risk they wish to take.
The second factor in pricing insurance products is loss history (claims presented against the policy form). This can be a difficult number to compute, since the size of a claim is never truly known until the file is closed. Although insurance companies are pretty good at settling small claims—the costs are generally straightforward, and most parties just want to get on with their lives—closing the file on a large claim can take many years, most of them spent doing the following.
For a new product, then, the first factor to consider in selecting a premium is simply an educated guess on the part of the underwriter. This guess also encompasses the initial policy form, because trial lawyers are going to hunt for any loophole they can find in whatever insurance policy form you create, in order to win the claim settlement lottery (33% of litigated claim settlements go into an attorneys' pockets). As claim follows claim, the insurer will alter the policy form until it most clearly defines the risk they wish to take.
The second factor in pricing insurance products is loss history (claims presented against the policy form). This can be a difficult number to compute, since the size of a claim is never truly known until the file is closed. Although insurance companies are pretty good at settling small claims—the costs are generally straightforward, and most parties just want to get on with their lives—closing the file on a large claim can take many years, most of them spent doing the following.
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