From Washington, DC, the world looks like a very complex place, likely because legislators are enthralled with the delicate balance between special interest groups and their own re-election efforts. They study issues and amass piles of information, but either avoid meaningful analysis or reject it outright.Over three decades in insurance, I have seen complexity: many good companies, a few very bad ones, massive rate increases and reductions, incredible profits, and staggering losses. In the final analysis, however,
I find that insurance is a simple business. Many people spend their lives trying to make it complicated, but a little midnight oil burned studying the numbers—coupled with a little common sense—can make the basics quite clear.
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 View
What 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" insurance 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 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 insurance policy form, because trial lawyers are going to hunt for any loophole they can find in whatever 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
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 View
What 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" insurance 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 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 insurance policy form, because trial lawyers are going to hunt for any loophole they can find in whatever 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
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