Actuarial Concept Series — #6

Actuarial Pricing Model

For long time, Insurers estimated premium rates through the application of various analytical tools, techniques and judgment.

Earlier we determined it using simplistic, not so precise & oftentimes subjective processes. This led insurers to rely heavily on judgment while deriving the premium rates.

Over time with scientific advancements in the understanding of risk supported by technological innovations in computing power and increased availability of data to analyze risks, the modeling of expected costs for the insurer and premium rates to charge has increased in both sophistication and precision.

This has sparked advances in quantitative modeling not only for insurance but for every industry.

Insurers have pioneered, for example, the field of catastrophe risk modeling, providing insurers with a much better understanding of the potential impacts of catastrophic events.

Premium rates derived in modern times consider the involved risk with better approximation than was the case before such models became ubiquitous. This has resulted in insurers feeling more confident about their business. Its second-order benefit is that policyholders are better protected.

Interestingly, when first introduced, such models were routinely attacked by industry critics and some regulators as “black boxes,” developed by insurers to pad profits. Of course, they have been proven wrong!!

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