IFoA SP8 cheat sheet

General Insurance Specialist Principles: Pricing, Reserving and Capital

• Burning cost = incurred claims (including IBNR and claims handling) divided by earned exposure, adjusted for trend, large losses and rate changes before applying to the projected exposure base.

• Risk premium = expected claims cost + expected expenses + cost of capital + profit margin; loadings for volatility, parameter uncertainty and frictional costs are added explicitly rather than hidden in a single margin.

• Frequency-severity decomposition: expected loss = expected frequency x expected severity; trend frequency and severity separately because inflation, tort reform and excess inflation act differently on each component.

• IBNR (incurred but not reported) reserves are estimated by chain-ladder, Bornhuetter-Ferguson or expected-loss methods; the BF method blends reported development with an a priori loss ratio and is more stable for immature or thin data.

• Chain-ladder development factors assume past development patterns persist; they are distorted by changes in case reserving strength, claims handling speed and mix, so diagnostics on factor stability are essential.

• Solvency capital for non-life risk typically aggregates underwriting risk (premium and reserve), market risk, credit risk and operational risk using correlation matrices or copulas, not simple addition, because risks are not perfectly correlated.

• Reinsurance pricing uses the same expected-loss logic but adds a risk loading for volatility; the cost of reinsurance to the cedant equals premium paid less expected recoveries plus the value of capital relief and reduced earnings volatility.

• Discounting: reserves and premiums should be discounted where cash flows are materially delayed, using risk-free rates consistent with the currency and duration; undiscounted comparison across lines is misleading.

• Premium rate adequacy is assessed by comparing the indicated risk premium (trended, on-level) with the current rate; on-leveling adjusts historical premiums for rate changes so loss ratios are comparable across years.