Pricing in General Insurance

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5

Pricing in Context

The job of pricing actuaries would be easier if they could remain oblivious to everything

except the portfolio of risks that they have to price. However, it so happens that the price of

insurance – and even the pure cost of risk – is inextricably linked with a number of factors

that are out of the control of the individual or the company that wishes to transfer the risk

and to the company that takes this risk on.

If you want to price a risk sensibly, there is no other solution than getting ‘streetwise’ – at least

in the limited sense of developing an understanding of what factors out there have an effect on

the pure cost of risk and on the premium actually charged. After all, the famous adage goes ‘the

past is not always a good guide to the future’, and the reason why it is not is that circumstances

constantly change, and there is really no option other than keeping abreast of all these changes

and being aware of the effect that they might have on your professional activity.

5.1 Regulatory Environment

Of all the things that can affect pricing, regulation is perhaps the most obvious, as it

imposes constraints on what can be insured, how much capital must be held by insurers

and possibly how products should be priced.

In the United Kingdom, insurance is regulated by the Prudential Regulation Authority

and the Financial Conduct Authority. Going forward, the regulatory requirements will

have to be consistent with the Solvency II regulatory framework of the European Union,

which has been a work in progress for several years now.

Here is a short list of possible ways in which the regulatory framework affects insurance

in general. Note that some of the following requirements (such as premium restrictions

and information restrictions) will affect pricing directly; others (such as capital require-

ments) will affect pricing indirectly; others yet (such as deposit requirements) are unlikely

to affect pricing in any signicant way.

5.1.1 Product Restrictions

Regulation restricts the type of business that can be underwritten/the products that can be

sold. For example, the suretyship product has been forbidden in some European territories

until recently.

5.1.2 Premium Restrictions

Regulation may limit or control the premium rates that can be charged. Motor insurance

prices in Turkey, for instance, were liberalised only in 2008: prior to that, the premiums

were tariff-based, that is, the insurance supervisory authority decided what premiums