Effect of premium calculation on risk reserve



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Texas Tech University


Premium calculation deals with the problem of determining the compensation insurance companies must charge their clients for assuming a particular risk that the clients are unwilling to absorb on their own. Risk involves uncertainty concerning loss resulting fi-om the unknown claims which, in turn, makes premium calculation difficult and yet open to many different methods. These methods of premium calculation are referred to in the literature as premium calculation principles and are described in detail in Chapter III. The goal of this paper is to study the short-term effect of the risk reserve in non-life insurance for three of the most common premium calculation principles: the expected value principle, the variance principle and the standard deviation principle. Even though these principles have been discussed in detail in many books and papers, there seems to be very little information available on exactly how these principles are used in real insurance industry practices. It is almost as if there is a gap between theory and practice. It is the goal of this paper to begin to narrow this gap by performing computer simulations that incorporate the theoretical premium calculations principles with real life insurance situations.