Pricing Binding Authorities

[TurnipKing]

Hello,

I am just wondering how the individual risks that are written under it a binding authority are priced in practice? In the the ASET April 2019 Q3 it states experience rating can be used for a binding authority for travel insurance and this has me wondering does it mean

1. experience rating as in a profit share with the BA based on claims experience of the business it writes
2. experience rating in that a flat fee is charged to all the risks the BA writes based on its historical experience (like a burning cost approach)?

Don't think Im understanding it correctly! Hope I've explained it enough.

 

[Katherine Young]

The Glossary has two alternative definitions, first that the premium for a risk will depend (at least in part) on the experience for that risk, second that the premium is based purely on the experience of that risk.

• Profit commission is common with binding authorities - this would be method 1 of your post and the first definition in the Glossary.
• On the other hand, the point in the Examiners' Report is pretty vague, it just says ‘. . . binders are also likely to have sufficient claims data for pricing’ - this doesn't really refer to experience rating at all, it only means that that the premium for the underlying risks could be based on the experience of the historical experience of the binding authority.
• For travel insurance, risks are often rated so that each individual’s experience will be reflected in the premium charged. This is the first definition in the Glossary and it could easily be used in this case. How the individual risks are rated doesn’t really have any bearing on the binder, which is just an agreement for one party to sell the other’s insurance – which may then in turn allow various rating methods (the binder may or may not specify how risks are rated).