Risk premium - loadings or not?

[thistleandspice]

I was wondering whether there's a failsafe way to know whether to discuss factors taking the theoretical risk premium to office/actual premium.

e.g. April 2005 Q1 ... List the data you require to carry out an assessment of the appriateness of the risk premiums.

The answer - usual policy/claims data, no marks for any loading/market condition type points.​

So is 'risk premium' always talking about the theoretical price, no loadings, no further considerations etc?

Thank you!

 

[Duncan Brydon]

The normal definition of the risk premium is “the amount of premium required to cover the expected cost of claims”. Hence you don’t need to mention tax loadings, commission loadings, adjustments to allow for competition, etc

One slight complication is that in Chapter 20 on Reinsurance Pricing, a slightly different definition of “risk premium” from that used throughout the rest of the notes is given. Chapter 20 says that the risk premium is “based on the expected loss cost plus a loading that reflects the risk that the actual loss cost turns out to be worse than expected”.

I therefore suggest that if you are asked about the risk premium in the context of Chapter 20 “Reinsurance Pricing”, you mention the inclusion of a “risk loading” on top of the expected cost of claims. (You could even state “I am using the definition from the Core Reading unit on reinsurance pricing” just to be on the safe side.)

I hope this helps. Good luck.