Report of the 2004 Reinsurance Pricing GIRO Working Party : Rating long-tail excess of loss reinsurance

Document description

We set three objectives for its report: outline current techniques for rating reinsurance of long-tail risks and discuss their relative strengths and weaknesses; identify issues specific to rating long-tail reinsurance business and discuss how well current techniques address the identified issues; prepare case studies to draw attention to one or more of the issues identified in greater detail. Case studies are to be presented to GIRO in the form of a workshop.

Previous GIRO papers and other published work have covered the details of actuarial rating techniques. We do not attempt to duplicate the work in this report except in outline. Readers wanting to find out more about the techniques involved are referred to other sources, for example the Institute Sessional paper Sanders et al (1995) and two previous GIRO working party papers Chandaria et al (1998) & (1999).

In this report, we are looking at rating from the viewpoint of the reinsurer, i.e. the party accepting a share of the long-tail risks written by the cedant. By long-tail, we mean that the original insured, or its interest, is exposed to claims that by their very nature are often not settled for several years from the time the original contract of insurance was issued. This may be a result of a delay in the manifestation of the loss itself or in the agreement of the final settlement amount.

We have considered rating only in the sense of technical pricing, i.e. producing a premium rate that is considered sufficient to achieve the desired profit margin. We do not consider market or strategic effects that may lead to a higher or lower actual premium rate. To quote Morton Lane (1996): "There is no right price of insurance; there is simply the transacted market price which is high enough to bring forth sellers, and low enough to induce buyers." We do not use this quote to suggest that knowing a correct technical rate is of no significant importance. Instead, we recognise that the rate is just one of a raft of factors underwriters use and are measured by.