Chapter 19: Premium Rate definition

[JL24]

Hello there, on page 18 of Chapter 19, a list of possible definition of premium rate is given.

- For 'expected loss', is this the mean loss we expect from the portfolio?
- For 'limit', is this referring to the estimated maximum loss / probable maximum loss? Referring to the question that follows (on household business), it says that 'per limit' is not suitable for household business, but 'per unit of expected loss' and 'per unit of exposure' (sum insured in this case) are acceptable. May I know the difference between 'limit', 'sum insured' and 'expected loss' in this case?
- What does 'risk-adjusted' exposure mean?

Thanks in advance!

 

[Busy_Bee4422]

Hi

Q1: "expected loss" doesn't seem to have a restricted meaning in this scenario. It, therefore, seems appropriate to interpret it broadly to include large losses or catastrophe loadings. This may or may not end up being the mean.

Q2: The word 'limit' is again being used without restriction. By referring to MPL etc you are restricting it to commercial property when limits also apply to liability cover as well. Household insurance is a personal lines cover where total loss (sum assured/exposure) is known and possible. There is also a significant volume of claims to estimate the expected losses.

Q3: 'risk adjusted' exposure to me seems to refer to exposure adjusted for risk factors that influence the level of risk.

 

[JL24]

Hi

Q1: "expected loss" doesn't seem to have a restricted meaning in this scenario. It, therefore, seems appropriate to interpret it broadly to include large losses or catastrophe loadings. This may or may not end up being the mean.

Q2: The word 'limit' is again being used without restriction. By referring to MPL etc you are restricting it to commercial property when limits also apply to liability cover as well. Household insurance is a personal lines cover where total loss (sum assured/exposure) is known and possible. There is also a significant volume of claims to estimate the expected losses.

Q3: 'risk adjusted' exposure to me seems to refer to exposure adjusted for risk factors that influence the level of risk.

Hi Busy_Bee4422,

Thanks for the explanation. One follow-up question, what is the difference between 'limit' and 'sum insured'? Referring to the same question on household business in this section, it says that per limit is not suitable while per sum insured is alright.

 

[Busy_Bee4422]

Hi

For household policies, the total value at risk is normally the sum insured. There may be sub-limits regarding cash or jewellery in the policy where the limit is the maximum covered by insurance. This is normally not related to the value at risk. Limits are not related to the total value at risk and if used as the sum insured may result in under/over-insurance in a household policy.

 

[JL24]

Hi

For household policies, the total value at risk is normally the sum insured. There may be sub-limits regarding cash or jewellery in the policy where the limit is the maximum covered by insurance. This is normally not related to the value at risk. Limits are not related to the total value at risk and if used as the sum insured may result in under/over-insurance in a household policy.

Thanks Busy_Bee4422!