BU353 Lecture Notes - Lecture 7: Loss Ratio, Cash Flow, Risk Aversion
Document Summary
Actuarial equity: loss ratios are across insureds. Social equity: premiums are the same across insureds with the same uncontrollable characteristics (e. g. age, gender, ethnicity, religion - are protected by human rights, cannot be rated by social rights) Slides p. 12 example 1: premium charged = 0. 15*1000 + 0. 85*0 = 150. Slides p. 13 example 2: under differentiation, fraidy cats would pay = 0. 1*1000 = 100, sky divers would pay = 0. 25 * 1000 = 250, polled premium = 0. 8 * 100 + 0. 25 * 250 = 130. A price war will push down the insurance price from a pool premium to the actuarial equity price. If you are the first to know the technique to separate consumer risk types, then you will earn substantially large amount of profit. Small corporates talk about the probability of the loss, based on loss history. Slides p. 19: classification variables: 1, 2, 3 are essentials, 4, 5 are nice to have, 4 may be a deal breaker.
