Pricing in the London Market

Document description

The paper is split into 2 primary sections. The purpose of these sections is to give a good but broad view of the techniques. Examples are included in each of the sections and are augmented by further examples in Appendix 3. A summary bibliography is included together with references to additional reading. It should be noted that this reference list is not comprehensive. Section 3 of this paper deals with the individual risk methods which are used currently in the day to day assessment of risks. Methods in this section are of value to those actively assisting the underwriter. Section 4 deals with the other issues which are normally implicit in the current pricing but need to be expressed explicitly. These include risk/reward approaches and detailed analysis of the cash flows and investment income (profit testing). These more general approaches have been used, and possibly of more substantial benefit to management than the 'premium checking'\; approach in section 3. The concept of the insurance cycle is introduced. In Section 5 the challenging issue of actuaries being actively used in underwriting is broached. There are many views on this subject, and some of the issues are addressed in that section. In Appendix 1 we try to identify other methods which have been used by one or two individuals to assess rates, but are generally not well known or adequately tested. These include approaches from Financial Theory and from Neural Networks. These methods are rapidly becoming part of today's actuary's toolbox and is an area of continual interest. These are both new directions and esoteric methods. Such methods, if they pass the test, will become the standard pricing techniques of tomorrow.