BU353 Lecture Notes - Lecture 10: Liquid Apogee Engine, Vehicle Insurance, Adverse Selection
Document Summary
Rating: done by underwriters, based upon past observations, of premiums, claims, loss adjustment expenses (lae) Influenced by: competition in marketplace, government. Claims cost = (losses and lae) / (number of exposure units: = [# of claims reported/# of exposure units] * [losses and lae/# of claims reported, = frequency * severity. Fair insurance premium: expected claims costs. Investment income: administrative costs, fair profit loading. Premiums + investment income = expected losses + expenses + profit/contingency loading: premiums = pv of expected losses + pv of expenses + pv of contingency loading. Rates must be: adequate, not excessive, not unfairly discriminatory, differences in premiums charged to different policyholders must reflect differences in loss exposures, actuarial vs. social equity. Why regulate rates: economic rationale for rate regulation is weak, empirical evidence is that p/c (property and casualty) insurance market is competitive. If insurance is mandatory but no insurer wants to undertake the risk, the residual market corrects for this.
