Pricing in General Insurance

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23

Pricing Considerations for Specic Lines of Business

This chapter is a quick gallery of pricing techniques for specic lines of business. It is nei-

ther comprehensive (many specialist lines of business have been left out) nor exhaustive (if

you are a specialist in one of these lines of business, you will inevitably nd the treatment

of that class of business rather shallow).

Rather, the lines of business included here have been selected to illustrate specic pric-

ing techniques:

• Professional indemnity (Section 23.1) to illustrate the pricing peculiarities of the

claims-made basis and of round-the-clock-reinstatements.

• Weather derivatives (Section 23.2) as an example in which rating is based on an

index rather than the policyholder’s experience.

• Credit risk (Section 23.3) as an example in which the role of systemic risk is paramount

and pricing is based on the individual risk model rather than the collective risk model.

• Extended warranty (Section 23.4) as an example in which the focus is on the fail-

ure of products and the probability of a loss is a function of age of the product.

• Aviation hull and liability (Section 23.5.1) as an example in which losses are mod-

elled based on publicly available information of losses, and there is tail correlation

between different components of the same loss.

• Business interruption (Section 23.5.2) as an example in which one may nd it

advantageous to use a compound severity distribution.

• Commercial motor insurance (Section 23.5.3) as another example in which each

claim has a property and liability component and a way of introducing the con-

cept of periodic payment orders (PPOs).

• Product liability (Section 23.5.4) as an example to illustrate the pricing peculiari-

ties of the integrated occurrence basis.

23.1 Professional Indemnity Cover

23.1.1 Legal Framework

The legal framework for professional indemnity policies (and similar policies) is tort law,

as it is for all liability insurance. Specically, however, these policies deal with negligent

advice given by professional people. It therefore applies to all professionals, whether they

are medical doctors, actuaries, engineers or lawyers, and this cover is typically bought

by rms and sole practitioners that are in the business of providing advice or services to

clients. Examples are law rms, engineering rms, actuarial rms, medical centres and

medical consultants.