Net risk premuim Flashcards
Principal of individual risk equivalence
The net risk premium = expectancy-value
What is the name of the premium that the consumer pays?
gross premium
What other name for the NRP
Actuarially fair premium
How is NRP achieved
Differentiation in premiums
What are individual or risk appropriate premiums?
Differentiated premiums
What are non-diffrenciated premiums called?
General premiums
Primary premuim diffrenciation
Happens at the beginning of the policy where the insured is underwritten on risk features
What are risk features used in primary differentiation
Age, state of health ….
What are the 2 types of NRP calculations
Absolute and relative
Absolute NRP
An amount in money
Relative
Percentage of the sum insured
How is relative NRP used?
When the insurer underwrites a risk then this percentage is applied to the respective sum insured
Relative frequency of loss
No. losses / no. risks
Average loss (absolute)
Loss amount (€)/losses
Absolute NRP
Relative loss (%) * average loss
Absolute NRP (fast)
Total losses/number of risks
Average loss (relative)
(Loss amount (€)/no. of Losses) /(Total sum insured/number of risks)
- Fast version: Average loss absolute/Avg. sum insured
Relative NRP
Relative loss % * average loss
Relative NRP (fast)
Total losses/total sum insured
What are the problems with primary differentiation
- Limits to providing the influence of factors to a loss
- Hard to decide whats factors are important
- Factors might not be consistent
- Can be time-consuming and expensive to find out
What is used to calculate secondary differentiation?
Claim history
How does experience rating differ from adaptation clauses?
Here adaptation clauses are used for inflation or other general changes
How do you calculate a secondary differentiated premium using the pure method (absolute)
Sum of all losses so far/(number of periods-1)
How do you calculate a secondary differentiated premium using the pure method (relative)
(Sum of losses/sum of sums insured) * sum insured
Modified method of secondary premium differentiation
The premium cant drop below or above a certain price
Credibility method of secondary premium differentiation
(1-credibility factor)*NRP+ Credibility factor * sum of individual losses
Effects of experience rating (2)
- Part of the Technical risk is borne by the policyholder.
- Premiums are differentiated
Issues with secondary premium differentiation (2)
- Only functional with high frequencies of damage
- Lacks severity
Problems with not individually equivalent NRP (3)
- Adverse selection
- Lack of structural neutrality
- Relative effects
Adverse selection
If you charge an average premium that subsidises bad risks then the good risks will leave causing the average premium to increase.
What factors in the market make adverse selection happen faster? (5)
- Easy to compare products
- Similar product with few differentiating factors
- No customer preferences
- Fast action from customers
- Rationality
Structural neutrality
NRP is independent form the structure of the premium - if the premium doesn’t change with every risk added then the NRP will not be equal to the expectancy value
Relative cross border subsidy effects between policyholders
Some policyholders pay too much because they bring less risk to the pool meaning they pay too much. The good risks subsidise the bad risks
