This comprehensive book on general insurance pricing has been developed from teaching material for the UK actuarial exam ST8, is on the reading list for SA3 and provides a guide to many aspects of general insurance pricing. The style is relatively informal and the focus is mainly practical rather than theoretical. This practical bent, including advice written from a practitioner’s perspective, means that it is a welcome addition to the more traditional actuarial texts such as Klugman et al. (Reference Klugman, Panjer and Willmot2012). The breadth of coverage means that although much of the book is intended for students or those new to pricing, parts of the book will also be of benefit to more seasoned pricing actuaries. The focus is on coverage of commercial and reinsurance pricing rather than personal lines, although introductions to some personal lines pricing topics are provided.
The first part of the book provides background material on UK product types, product design and the insurance market place, as well as the internal structure of insurance companies and the role that actuaries play within them. The second part provides in-depth coverage of the frequency-severity experience-based rating often used in commercial lines, at a level suited to those with no prior experience of this type of pricing. This will therefore be useful to actuarial students as well as more experienced actuaries looking to move into the pricing arena (annual aggregate deductibles and other features of product design in commercial lines and the London market are covered). Example spreadsheets are available on the book’s website.
The last two parts of the book cover various topics, including property exposure curves, increased limits pricing, an introduction to catastrophe models, introductions to credibility theory, generalised linear models, copulas and insurance structure optimisation. Some of these topics deserves a book in their own right and cannot be covered in detail, but a useful introduction is given and references for further reading are provided.
Coverage of pricing topics is broad – the book runs to 500 pages. The list below gives an idea of the scope of the book:
∙ Explanation of product features, e.g., annual aggregate deductibles with ranking and non-ranking deductibles, risks attaching versus losses occurring, reinstatements and indexation clauses.
∙ The collective risk model.
∙ The requirement for an actuary to be familiar with commercial aspects of the risk, e.g., mergers and acquisitions, changes in the risk profile, etc.
∙ Data requirements.
∙ Claims inflation; how it can be measured and how to allow for it in pricing work.
∙ Model validation using training and test sets.
∙ The claims frequency modelling required for experience-based rating, including incurred but not reported calculations to estimate ultimate claim numbers and a choice of appropriate probability distributions. Includes a discussion of the author’s “Triangle-Free” reserving method.
∙ Discussion of models for severity including extreme value theory and the generalised Pareto distribution.
∙ Various approaches to calculating the aggregate loss distribution, including simple approximations, Fourier transforms, Panjer’s recursion and Markov Chain Monte Carlo.
∙ Identifying, measuring and modelling uncertainty – including process, parameter and model uncertainty.
∙ The additions to get from risk to price. Some detail on capital allocation to individual risks is provided and a simple practical method is demonstrated.
∙ Price optimisation and the pricing cycle, including rate monitoring (and premium adequacy).
∙ The adjustments needed to apply techniques to non-proportional insurance, e.g., estimation of payment patterns so as to allow for the indexation clause.
∙ Property exposure curves and the Bernegger MBBEFD curves. How to apply them to produce estimates of losses to a layer for excess-of-loss (XoL) insurance and a suggested approach for direct insurance where data on the severity distribution is limited.
∙ Increased limits factors (ILF), impact of inflation, application to XoL rating. Discussion of the ISO approach to ILF estimation.
∙ Pricing considerations for specific lines of business including warranty and credit risk.
∙ Catastrophe models. Hazard–vulnerability–financial modules. Occurrence exceedance probability and aggregate exceedance probability curves from event loss tables.
∙ Credibility. Covering the basics to Bühlmann–Straub model.
∙ An introduction to generalised linear models; starting with the need for rating factor analysis. The reader is referred to Anderson et al. (Reference Anderson, Feldblum, Modlin, Schirmacher, Schirmacher and Thandi2004) for further details. Mention is made of generalised additive models but no details are given and the reader is referred to the relevant papers. Forward and backward selection using Akaike information criterion, cross validation and some example of R code for model fitting.
∙ Dependency through copulas or common shock model.
∙ Introduction to insurance structure optimisation; a theoretical approach (efficient frontier) and a more practical approach (total cost of risk, with a worked example).
In summary, this book will be of great use to students and to those moving into general insurance pricing, but also contains specialist material in certain areas that will be of interest to more seasoned actuaries.
