Actuarial pricing, capital modelling and reserving


Pricing Squad


Issue 17 -- August 2017

Welcome back to Pricing Squad!

Pricing Squad is a newsletter for fellow pricing practitioners and actuaries in general insurance.

Today's issue is on the beauty of pricing.

You can also watch a screencast demo of Pricing Express - the GLM-free rate change impact calculator.


Screencast - GLM-free rate change impacts

As a regular reader of Pricing Squad you know already that GLM-free methods predict rate change impacts 1000 times faster and are more accurate than GLM elasticity-based models.

You can transform the way you calculate rate change impacts by watching this four minute video. Enjoy!


The beauty of risk pricing

Risk

"Risk" is another word for "stuff one does not know".

At dawn, human race knew very little so almost everything was "risk". Will it rain? What is on the other side of the river? Do dead people turn into animals?

We know more today but the count of risks is still the same i.e. infinite.

Insurance pools large quantity of risks turning them into a single (near) certainty. Some types of risks lend themselves to this trick.

Pricing

The pricing system is the basic signalling system of a free society.

This societal nervous system signals what remote people want and how much they want it in comparison to other things and to its availability. In this way, a pricing system provides us with information on what to produce, and what resources to use.

Without a pricing system the society develops Alzheimer and collapses like the Soviet Union did or fragments as it becomes impossible to coordinate human action beyond a small social circle.

For example, if Mike was making a table, he might choose to build it from platinum, unaware that that this material is very highly desired elsewhere. He would use up a lot of platinum to make furniture and the microchip factory would have to close due to unavailability of this resource.

Ann might decide to build her house by flying 10,000 workers from Okinawa as it would seem just as rational as hiring five local blokes.

Pricing systems enables rational and peaceful coordination. The alternative is a system of directives or lack of cooperation all together.

Risk pricing

Since risk is a by-product of most human action, by pricing it we guide people towards actions which maximise coordination with the rest of the society.

For example, a price reduction on restaurant owners tells entrepreneurs that less negative externalities result from starting or expanding a restaurant. Therefore they will respond by installing more tables and hiring more people. The resources they employ will ultimately be the same marginal resources which got released from a different human activity (production or consumption) where insurance cost increased.

As pricing actuaries, we co-create this intricate pricing system and in a beautiful, organic manner. None of us necessarily knows how to perfectly price for risk but we all have some good ideas.

As long as there is competition in the market for insurance services and pricing services, those of us who price most sensibly will spread their good pricing memes.

The society benefits because people can better coordinate their activities. This results in less waste, less stress and more fulfilment.


Do you need support?

If you need access to pricing tools to radically simplify your work and deliver reduced loss ratio quickly, or if you are simply looking for an actuarial contractor, get in touch.

Thank you for reading, and have a great day,
Jan Iwanik, FIA PhD


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