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Pricing in General Insurance
Based on the syllabus of the actuarial industry course on general insurance pricing ― with additional material inspired by the author’s own experience as a practitioner and lecturer ― Pricing in General Insurance presents pricing as a formalised process that starts with collecting information about a particular policyholder or risk and ends with a commercially informed rate. The main strength of this approach is that it imposes a reasonably linear narrative on the material and allows the reader to see pricing as a story and go back to the big picture at any time, putting things into context. Written with both the student and the practicing actuary in mind, this pragmatic textbook and professional Pricing in General Insurance delivers a practical introduction to all aspects of general insurance pricing, covering data preparation, frequency analysis, severity analysis, Monte Carlo simulation for the calculation of aggregate losses, burning cost analysis, and more.
586 pages, Hardcover
First published July 26, 2014
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February 24, 2023
pricing a portfolio of properties of a company requires some understanding of what that company does (is it producing gunpowder or hosting data centres?) and what perils (natural and man-made) these properties are exposed to in the territories the company operates in.
This book is based on my experience as both a practitioner and a part-time lecturer at Cass Business School in London.
Loss Models: from Data to Decisions by Klugman
Also assume that you have agreed to insure only 95% of each loss, so that the insured has an active interest in keeping the number of claims low.*
assuming that my expenses (such as the expenses of dealing with policies and claims) are roughly 15% of the premium, and that I want 10% profit, how much should I charge for this policy?
That is, we have average losses of approximately £1.30M, of which only 95% (£1.23M) will remain to the insurer to which we have to add a loading for expenses and profits, yielding £1.23M/85%/90% ~£1.61M.
We have subdivided the various steps of the process into four main categories: risk costing (gross), which is the estimation of the future losses regardless of who pays for them; risk costing (ceded), which is the estimation of that portion of the losses that is covered by the insurer; determining the technical premium, which leads to the premium suggested by the actuary, based on the losses and other relevant costs; and finally, commercial considerations and the actual premium, which explains why the premium suggested by the actuary may be overridden.
even the 2013 figure may not be fully complete, and because in some cases liability claims take several years to be reported (asbestos-related claims – which were reported up to 30 years after the period when the worker was working with asbestos – are a case in point), there might be missing claims in all of the policy years. These missing claims are called incurred but not reported (IBNR) claims.
Obviously, a claim that occurred in 2005 would have, if it occurred again under exactly the same circumstances in 2015, a much larger payout, because of something called claims inflation. Claims inflation is not the same as the retail price index inflation (RPI) or the consumer price index inflation (CPI) that we have in the United Kingdom. Let us assume that claims inflation for the table above is 5%. It is a commonly used assumption by underwriters for UK liability business.
even if the exposure remains the same, the risk may change because, for example, the proportion of employees in manual work changes or because, for example, new technologies/risk-control mechanisms are introduced that make working safer. Ideally, one would like to quantify all these changes by creating a ‘risk index’
it is often the case that insurers make systematic upward or downward errors on estimates, whether deliberately or not: the error amount is called the IBNER (incurred but not enough reserved
Other costs that we have ignored in this simple example will, in general, include commission charges to be paid to brokers and reinsurance costs.
The idea being that if we charge £2.12M for premium today, we will have £2.32M to pay for claims and expenses in 3 years’ time.
investors will require a certain return on the capital that they have put into the firm. The capital loading necessary for each policy will be provided by the capital modelling function of the firm
if the total losses exhibit an increasing trend over the years, it enables us to identify whether this derives from an increase in the number of claims or in the nature (and therefore the severity) of their claims or as a combination of the two elements.
the absence of individual loss information makes it difficult to price insurance policies with non-proportional elements – for example, policies that pay only the portion of the claim that lies above a certain retention threshold, called excess or deductible (note that the presence of an excess is indeed quite common, for example, in comprehensive motor policies).
1. First, familiarise with the risk and (where applicable, such as in commercial insurance/reinsurance) with the insured’s business. Then,
2. given information on claims, exposure and cover…
3. … estimate the cost of taking on the risk…
4. … take into account the related cost of running the business (underwriting, claims management, payrolling, etc.) and investment income…
5. … add an allowance for profit (which is constrained by capital considerations and therefore requires an input from the capital modelling function), thus obtaining the technical premium…
6. … and based on the technical premium and commercial considerations, determine the actual premium to be charged.
to price household insurance, one needs to know that it protects against perils such as fire, flood or theft, and needs to know what the factors are that make one house riskier than another.
a motor insurance that pays only claims of more than £500 is not the same as a policy that pays the full amount. As a pricing actuary, you need to be able to quantify the effect of increasing or decreasing the deductible (or the limit).
products that should be together are split and products that should be split are brought together artificially.
insurance products can be classified into four broad categories: liability, property, financial loss and fixed benefits
the insurance of ships with their cargo – for centuries, the most important type of insurance and that around which the London Market was born – can be seen as a form of property insurance cover.
all sorts of expensive equipment to be employed in all sorts of undertakings: ships, trains and planes for commerce and travel; satellites for communications; machinery in industrial plants; the industrial plants themselves; large construction projects; large scientific projects and so on.
Principle of Indemnity. This is one of the leading principles of insurance in general and states that the purpose of insurance is to reinstate (at least partially) the insured to the financial position (s)he had before the loss occurred.
Insurable Interest. The principle of insurable interest means that you are not allowed to wager on the possibility of losses for properties that you have no interest in, such as the house of your neighbour down the road, which you might suspect will be damaged in the next big flood.
most losses will be smaller than the MPL, which gives the maximum probable loss.
Liability insurance indemnifies the insured for legal liability related to bodily injury, property damage, financial loss or reputational damage caused by the insured to a third party because of negligence or other types of tort. Legal expenses are normally covered as well.
The legal framework under which liability claims operate is that of tort law. Tort comes from the Latin word for ‘twisted’, the idea being that something has gone wrong and has to be straightened out – or put right. In practice, this means that people must be indemnif ied for the wrongs of which they were victims. There are many categories of tort, but the most important for liability insurance is that of negligence, that is, the idea that someone had a duty of care towards their neighbour and has somehow failed to exercise it. When this type of tort was introduced, it was to attempt to repackage the evangelical principle ‘Thou shalt love thy neighbour as thyself’
This book is based on my experience as both a practitioner and a part-time lecturer at Cass Business School in London.
Loss Models: from Data to Decisions by Klugman
Also assume that you have agreed to insure only 95% of each loss, so that the insured has an active interest in keeping the number of claims low.*
assuming that my expenses (such as the expenses of dealing with policies and claims) are roughly 15% of the premium, and that I want 10% profit, how much should I charge for this policy?
That is, we have average losses of approximately £1.30M, of which only 95% (£1.23M) will remain to the insurer to which we have to add a loading for expenses and profits, yielding £1.23M/85%/90% ~£1.61M.
We have subdivided the various steps of the process into four main categories: risk costing (gross), which is the estimation of the future losses regardless of who pays for them; risk costing (ceded), which is the estimation of that portion of the losses that is covered by the insurer; determining the technical premium, which leads to the premium suggested by the actuary, based on the losses and other relevant costs; and finally, commercial considerations and the actual premium, which explains why the premium suggested by the actuary may be overridden.
even the 2013 figure may not be fully complete, and because in some cases liability claims take several years to be reported (asbestos-related claims – which were reported up to 30 years after the period when the worker was working with asbestos – are a case in point), there might be missing claims in all of the policy years. These missing claims are called incurred but not reported (IBNR) claims.
Obviously, a claim that occurred in 2005 would have, if it occurred again under exactly the same circumstances in 2015, a much larger payout, because of something called claims inflation. Claims inflation is not the same as the retail price index inflation (RPI) or the consumer price index inflation (CPI) that we have in the United Kingdom. Let us assume that claims inflation for the table above is 5%. It is a commonly used assumption by underwriters for UK liability business.
even if the exposure remains the same, the risk may change because, for example, the proportion of employees in manual work changes or because, for example, new technologies/risk-control mechanisms are introduced that make working safer. Ideally, one would like to quantify all these changes by creating a ‘risk index’
it is often the case that insurers make systematic upward or downward errors on estimates, whether deliberately or not: the error amount is called the IBNER (incurred but not enough reserved
Other costs that we have ignored in this simple example will, in general, include commission charges to be paid to brokers and reinsurance costs.
The idea being that if we charge £2.12M for premium today, we will have £2.32M to pay for claims and expenses in 3 years’ time.
investors will require a certain return on the capital that they have put into the firm. The capital loading necessary for each policy will be provided by the capital modelling function of the firm
if the total losses exhibit an increasing trend over the years, it enables us to identify whether this derives from an increase in the number of claims or in the nature (and therefore the severity) of their claims or as a combination of the two elements.
the absence of individual loss information makes it difficult to price insurance policies with non-proportional elements – for example, policies that pay only the portion of the claim that lies above a certain retention threshold, called excess or deductible (note that the presence of an excess is indeed quite common, for example, in comprehensive motor policies).
1. First, familiarise with the risk and (where applicable, such as in commercial insurance/reinsurance) with the insured’s business. Then,
2. given information on claims, exposure and cover…
3. … estimate the cost of taking on the risk…
4. … take into account the related cost of running the business (underwriting, claims management, payrolling, etc.) and investment income…
5. … add an allowance for profit (which is constrained by capital considerations and therefore requires an input from the capital modelling function), thus obtaining the technical premium…
6. … and based on the technical premium and commercial considerations, determine the actual premium to be charged.
to price household insurance, one needs to know that it protects against perils such as fire, flood or theft, and needs to know what the factors are that make one house riskier than another.
a motor insurance that pays only claims of more than £500 is not the same as a policy that pays the full amount. As a pricing actuary, you need to be able to quantify the effect of increasing or decreasing the deductible (or the limit).
products that should be together are split and products that should be split are brought together artificially.
insurance products can be classified into four broad categories: liability, property, financial loss and fixed benefits
the insurance of ships with their cargo – for centuries, the most important type of insurance and that around which the London Market was born – can be seen as a form of property insurance cover.
all sorts of expensive equipment to be employed in all sorts of undertakings: ships, trains and planes for commerce and travel; satellites for communications; machinery in industrial plants; the industrial plants themselves; large construction projects; large scientific projects and so on.
Principle of Indemnity. This is one of the leading principles of insurance in general and states that the purpose of insurance is to reinstate (at least partially) the insured to the financial position (s)he had before the loss occurred.
Insurable Interest. The principle of insurable interest means that you are not allowed to wager on the possibility of losses for properties that you have no interest in, such as the house of your neighbour down the road, which you might suspect will be damaged in the next big flood.
most losses will be smaller than the MPL, which gives the maximum probable loss.
Liability insurance indemnifies the insured for legal liability related to bodily injury, property damage, financial loss or reputational damage caused by the insured to a third party because of negligence or other types of tort. Legal expenses are normally covered as well.
The legal framework under which liability claims operate is that of tort law. Tort comes from the Latin word for ‘twisted’, the idea being that something has gone wrong and has to be straightened out – or put right. In practice, this means that people must be indemnif ied for the wrongs of which they were victims. There are many categories of tort, but the most important for liability insurance is that of negligence, that is, the idea that someone had a duty of care towards their neighbour and has somehow failed to exercise it. When this type of tort was introduced, it was to attempt to repackage the evangelical principle ‘Thou shalt love thy neighbour as thyself’
May 7, 2025
Must have for any Pricing Actuary
A wonderful reference resource to have for any pricing actuary. Highly recommended and worth the space on your bookshelf. Would have given more than 5 stars if allowed.
A wonderful reference resource to have for any pricing actuary. Highly recommended and worth the space on your bookshelf. Would have given more than 5 stars if allowed.
October 8, 2025
very technical, which is to be expected. very interesting read.
July 30, 2017
Insurance Underwriting books are hard to find (outside of insurance training/education sources). This is one of few that gets into some detail (beyond general agent education). Not too hard to follow (except for the later third when it gets into modeling).
Displaying 1 - 4 of 4 reviews