Pricing Risk

  • It's tough to price in a very disciplined way when any fly-by-night company can come by and undercut you.
  • Somebody could take a flier and come out with a product with a low rate and if it works out they benefit, if it doesn't work out we pay the cost.

    -- Michael Davlin

    1985 - ACTUARIAL PRICING ASSUMPTIONS IN A VOLATILE ENVIRONMENT, Society of Actuaries

  • Such a pricing risk arises from the exposure to financial loss from transacting insurance business where actual costs and liabilities in respect of a product line exceed the expectations when pricing the contract.
  • It is also related to asset liquidity risk insofar that insufficiently liquid assets could imply that a firm might not obtain the necessary funds to meet its obligations as they fall due by selling off assets. (p19)

2001 - RISK MANAGEMENT PRACTICES AND REGULATORY CAPITAL CROSS-SECTORAL COMPARISON, Basel Committee on Banking Supervision, The Joint Forum

Take the pricing risk.

Mutuals, for most of the past 130 years, have favored gross premiums high enough to minimize the risk that any block of business would not be self-supporting.

  • Joseph B. MacLean, addressed this matter in a 1945 edition of his book, Life Insurance.
    • He wrote that participating premiums should be based upon "conservative, perhaps ultra-conservative" assumptions as to mortality and interest.
    • For nonparticipating premiums, MacLean added that it was sufficient for premiums to be on a "safe" basis. (8)

--  JOHN C. ANGLE

1980 - NONFORFEITURE AND VALUATION CONCERNS IN THE 1980'S, Society of Actuaries - 16p