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  #1  
Old 05-05-2012, 05:35 PM
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Default transfer of risk vs individual risk transfer

anyone mind explaining the differences between these two in layman's terms? these are ratemaking principles

http://www.casact.org/library/sppcrate.pdf

2. a rate provides for all costs associated with the transfer of risk
3. a rate provides for all costs associated with individual risk transfer

i read the description but still don't really understand it that well.
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Old 05-05-2012, 06:42 PM
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I interpret it to mean ...

#2 Means you need to charge in aggregate to cover losses and expenses associated with writing business
#3 Means that it isn't enough to be priced in aggregate, but that you need to do it by account

It's essentially the same thing, but I think #2 is more related to underwriting expense whereas #3 is related to loss costs.
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Old 05-05-2012, 10:46 PM
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I think these make more sense when you learn about the history of insurance.

As I see it, #2 relates to the costs of doing insurance for a specific line, similar to what HuskerCAS points out. In other words, the insurance company should not shift their expenses for underwriting and marketing of auto business to their homeowner lines in order to justify a lower rate for auto insurance.

#3 relates to charging equitable rates for specific risks. For example, identical risks should be charged the same--or if the premiums are different, you can point to the difference in exposure that prompts the difference in rates. Loss costs can be a significant driver, but expenses can also play a role in the rate differential as well.
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Old 05-05-2012, 11:36 PM
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This is also discussed on pages 6-7 in good detail.
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