Net risk premuim

Question 1

Principal of individual risk equivalence

Answer 1

The net risk premium = expectancy-value

Question 2

What is the name of the premium that the consumer pays?

Answer 2

gross premium

Question 3

What other name for the NRP

Answer 3

Actuarially fair premium

Question 4

How is NRP achieved

Answer 4

Differentiation in premiums

Question 5

What are individual or risk appropriate premiums?

Answer 5

Differentiated premiums

Question 6

What are non-diffrenciated premiums called?

Answer 6

General premiums

Question 7

Primary premuim diffrenciation

Answer 7

Happens at the beginning of the policy where the insured is underwritten on risk features

Question 8

What are risk features used in primary differentiation

Answer 8

Age, state of health ….

Question 9

What are the 2 types of NRP calculations

Answer 9

Absolute and relative

Question 10

Absolute NRP

Answer 10

An amount in money

Question 11

Relative

Answer 11

Percentage of the sum insured

Question 12

How is relative NRP used?

Answer 12

When the insurer underwrites a risk then this percentage is applied to the respective sum insured

Question 13

Relative frequency of loss

Answer 13

No. losses / no. risks

Question 14

Average loss (absolute)

Answer 14

Loss amount (€)/losses

Question 15

Absolute NRP

Answer 15

Relative loss (%) * average loss

Question 16

Absolute NRP (fast)

Answer 16

Total losses/number of risks

Question 17

Average loss (relative)

Answer 17

(Loss amount (€)/no. of Losses) /(Total sum insured/number of risks)
- Fast version: Average loss absolute/Avg. sum insured

Question 18

Relative NRP

Answer 18

Relative loss % * average loss

Question 19

Relative NRP (fast)

Answer 19

Total losses/total sum insured

Question 20

What are the problems with primary differentiation

Answer 20

• 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

Question 21

What is used to calculate secondary differentiation?

Answer 21

Claim history

Question 22

How does experience rating differ from adaptation clauses?

Answer 22

Here adaptation clauses are used for inflation or other general changes

Question 23

How do you calculate a secondary differentiated premium using the pure method (absolute)

Answer 23

Sum of all losses so far/(number of periods-1)

Question 24

How do you calculate a secondary differentiated premium using the pure method (relative)

Answer 24

(Sum of losses/sum of sums insured) * sum insured

Question 25

Modified method of secondary premium differentiation

Answer 25

The premium cant drop below or above a certain price

Question 26

Credibility method of secondary premium differentiation

Answer 26

(1-credibility factor)*NRP+ Credibility factor * sum of individual losses

Question 27

Effects of experience rating (2)

Answer 27

• Part of the Technical risk is borne by the policyholder.

- Premiums are differentiated

Question 28

Issues with secondary premium differentiation (2)

Answer 28

• Only functional with high frequencies of damage

- Lacks severity

Question 29

Problems with not individually equivalent NRP (3)

Answer 29

• Adverse selection
• Lack of structural neutrality
• Relative effects

Question 30

Adverse selection

Answer 30

If you charge an average premium that subsidises bad risks then the good risks will leave causing the average premium to increase.

Question 31

What factors in the market make adverse selection happen faster? (5)

Answer 31

• Easy to compare products
• Similar product with few differentiating factors
• No customer preferences
• Fast action from customers
• Rationality

Question 32

Structural neutrality

Answer 32

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

Question 33

Relative cross border subsidy effects between policyholders

Answer 33

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