Risk assessment, underwriting and pricing of general insurance
This domain tests the pricing chain from exposure to technical premium: identifying hazards, setting underwriting terms, estimating frequency and severity, loading expenses and profit, and deciding whether the market premium is adequate.
Core rules
- Exposure, hazard and vulnerability: exposure is the amount at risk; hazard increases the chance or size of loss; vulnerability is the loss given an event.
- Frequency-severity: expected loss cost = expected frequency × expected severity. Large losses and catastrophe loads are usually added separately.
- Experience versus exposure rating: burning cost uses the insured's own losses, with credibility weighting; exposure rating uses market loss costs and relativity factors.
- Technical premium: loss cost divided by (1 − expense ratio − profit load − reinsurance cost ratio), assuming those loads are percentages of premium.
Worked example
A commercial property account has 1,000 premises, expected claim frequency 8% and average severity £40,000. Expected loss cost = 0.08 × £40,000 × 1,000 = £3.2m. Expenses are 22% of premium, profit 8% and reinsurance 5%, so the technical premium = £3.2m / (1 − 0.35) = £4.923m, or £4,923 per premises. If the market premium is £4.5m, the expected combined ratio is (3.2 + 0.99 + 0.225)/4.5 = 98.1%, below the 108% target implied by the profit load.
Traps that cost marks
Failing to on-level historical losses for inflation and exposure drift; applying a single average severity when large losses dominate; double-counting catastrophe load and reinsurance cost; and quoting a rate change without stating the exposure basis.
Exam tip
State the exposure base, the loss-cost basis and the credibility weighting. A pricing answer without these is usually only half-credit.