Tuesday, January 17, 2017

Rate Making: How Insurance Premiums Are Set


Here "exposure units" are people. And this number is in the denominator so the larger the 'exposure units' the lower the pure premium.

Pure Premium = Losses / Exposure Units

To get the Pure Premium down, you should determine/willfully seek the highest number of Exposure Units possible.

Rate Making: How Insurance Premiums Are Set
thismatter.com

12 comments:

Noah Way said...

Nice theory.

Penguin pop said...

Insurance 101. I knew this equation looked familiar. I did an intro class on this.

Penguin pop said...

*took

Tom Hickey said...

The way that insurance works is through multiple pools. As pools shrink over time, premiums tend to rise.

An insurance friend advises to switch companies on a regular basis not only because of this but because cos offer sweet deals to switch that only last a limited period although they don't tell you that when you sign on. When the premium hike comes, look for a better deal. Most people aren't up for the hassle, so they pay the rent.

Noah Way said...

Insurers make money on denial. Everybody knows this.

Noah Way said...

Tom, I like the way you use 'rent'.

Tom Hickey said...

Insurers make money on denial. Everybody knows this.

That one way, but it is built into the structure through the pools so that people that never submit claims still pay rent.

The rent is the higher price than necessary that is built in.

As Matt says, if there were a single pool, the premium would be a lot lower.

Insurance don'ts run that way now, and changing it would involve a big fight with the cos.

André said...

"Pure Premium = Losses / Exposure Units

To get the Pure Premium down, you should determine/willfully seek the highest number of Exposure Units possible"

It's good for the insurer to seek the highest number of Exposure Units possible because of the diversification effect, not because that equation.

Remember that the Losses also grow when the number of Exposure Units grow. It is not a constant. So it is impossible for the denominator of the equation to rise while making the nominator constant.

Matt Franko said...

I'm not explaining this from the insurers pov...

This is from the buyer's pov....

If the model has average loss per 1 exposure unit as $25k then the pure premium is $25/1 or $25k

If the model has average loss per 100,000 exposure units as $1,000,000,000 then the pure premium is $1B/100,000 or $10,000

If you are in the non-Insurance sector you want to pay the least amount you can arrange for your insurance...

Matt Franko said...

For ACA, whose idea was it to put an "individual mandate" in an insurance scheme in the first place?

Matt Franko said...

"individual mandate" implies an exposure unit of 1.... doesnt sound ideal to say the least...

Matt Franko said...

If a corp. with 50,000 employees goes out to UNH to buy insurance for their workforce nationwide, do you think they tell UNH: "just price it like we have only one employee!"

You have to get the exposure units UP.... as a buyer...