Non-Life Insurance: Pricing

This chapter explains the approach for calculating a non-life insurance premium. The reader can follow the pricing procedure step by step. The method begins from the frequency of an event occurring and the average cost of loss events. These two factors contribute together to defining the first step, also called an equitable premium. A safety loading is then added to this first kind of premium. This kind of premium is defined as net premium and is the basis of insurance technique. During this chapter, other safety loadings are presented that by way of addition are added to the net premium. Each of these safety loadings has the purpose of covering management expenses and acquisition costs of contracts. At the end of this addition operation, it is possible to know the final value of the premium. In the paragraphs that follow, each of these components is analysed in detail. Multivariate analysis in determining the premium is explained: from the frequency to the equitable premium, from safety loading to additional charges, illustrating with simple examples the process adopted for their formulation.