Some aspects on reinsurance profits and loadings

Extract

In a note on the security loading of excess loss rates I am deducing a simple formula intended to replace some tedious calculations. In the beginning of that note I made the point that some authors recommend a loading proportional to the dispersion of the total claims amount of a treaty δ₁ while others tend to favour .

I also stated that a loading proportional to δ₁ or its estimate δ₁* could be deduced from the statistical uncertainty in measuring the risk (section 4).

The question has been raised if and to what extent a loading system based on the dispersion is unduly punishing the smaller portfolios. This will be examined below.

The pricing concept will be analyzed from the point of view of a big dominating Reinsurer who wants to be fair in all directions. The conclusion of this study supports an affirmative answer to the question put above.

In a second part the loading is studied from a different angle bringing competition into the picture. The pricing or loading becomes a problem of operations research under the simplified assumption that profit is the only purpose of our activity. Not unexpectedly, the loading coming out from this aspect differs from those of part one.

Part two also deals with the question of how much of the loadings which we are aiming for, get lost in the competitive process. It is also shown that in most cases the harder the competition is, the higher loadings shall be used.

Part one and part two thus deal with the loading problem from different aspects, and illustrate the complexity of the problem. It is my hope that this note could stimulate further researches in this interesting and important area, also in a moment when some reinsurers are more concerned with the question of surviving than in fixing the loadings which should on the average and in the long run turn up as profits.