Pricing in general insurance: a new perspective

14 January 2021 — Media XPRIMM
By Octavian COSENCO, Member of the ARA Board
"Tesla Invites Actuaries to Help It Create a "Revolutionary" Insurance Company" (, July 24, 2020). The title of the article is edifying: Tesla, one of the largest, if not the largest, car companies in the world - in any case one of the most well-known and revolutionary companies - is in the search for actuaries with specific qualities (quoted from the article: "good at math "," [with] high energy "," wanting to change things ") for implementing of a idea which they regard as "revolutionary".

The idea is relatively simple: create a mathematical and statistical model, adaptable in real time, to provide high quality services. Both the theoretical and the practical concepts are well known to the actuarial profession; the biggest challenge of such a project is the implementation, which can be very complex. The premise of this is the "universal" law that any product which seems very simple to use at first glance has a sophisticated and complex implementation behind it. In other words, the smoother and leaner is the interaction between the client and the platform supporting it, the more "engine" (including all systems and processes involved) behind the platform must perform numerous and complex operations and make decisions on their own. In the insurance language, this translates into the creation of a platform that creates an as accurate as possible risk profile for each client "(quoted in the article:" [that] accuracy of information is "at the heart of being competitive" with insurance "In addition, such a platform will have to identify the customer's needs on its own so that it can generate a package of services that suits each customer, and all this in conditions of competition in the market, so that such an activity remains profitable.

Such a solution is very plausible. But the key question is: what role do actuaries have? The actuary is the one who "orchestrates" this process, in order for all factors contributing to the simplicity of the product, including the sale of insurance and possible damages, are quantified in a single value: the insurance premium.

The calculation of the insurance premium is based on some key information:

o The risk(s) insured. In motor insurance, the key information focuses on the driver and the vehicles. The majority of the information is important, including the family status (married or otherwise), whether he/she has children, the driving style (which is often correlated with factors such as the driver's profession), vehicle made, claim history (road accidents or other), financial history (banking history, tax payments), the existence of other insurance, educational level, profession, even social media posts, etc.

The list may go on and a lot of new information could be added, relevant to the determination or quantification of the insured risk(s). All of this represents a huge amount of information. All the more so, as not only the history of this information will be used, but also its future evolution over time.

o The type of accident that may occur in the future. It may be a minor accident, resulting in only minor property damage, or a major accident, including human casualties. And last but not least, the frequency of such accidents.

All of the above information is required in the process of calculating the insurance premium. We will discuss all the essential elements of this process and ignore elements that would excessively complicate this exercise, such as investments or the presence of reinsurance.

Calculating the insurance premium, once the information listed above is obtained, is a well-defined process in an insurance company. To the insurance premium, let's say the risk premium (which is strictly the premium calculated to cover insurance losses) are added other elements - such as administrative expenses, acquisition and so on.

A risk premium will also be assessed in terms of competition - it is expected that insurance companies, even when they have the most detailed information available, in real time, will compare the price of their products with those of the competition.

With all this information at hand, with a first version of the insurance product pricing model, you can generate a business plan for insurance companies. This plan will have as premises, among others, the criteria of profitability of insurance products - an aspect that must meet both the expectations of shareholders and customers, which will be the main criteria for the final premium rates (differences between initial and final rates are often due to expenses, with the risk premium usually remaining unchanged).

Once the final premium rates have been set, the actuaries will not go on holiday yet, as they will need to monitor the relevance of the indicators and factors they have taken into account. Actuaries play a key role in monitoring the loss and profitability of an insurance policy. All the more so in the context of the "revolution" announced by Tesla, a situation in which actuaries will be "bombarded" with information, nonetheless necessary in the calculation of the insurance premium. Moreover, this information becomes "live" (i.e. will have an immediate impact on the insurance premium). Often, such monitoring will result in corrections to insurance premiums, by correcting risk factors and indicators with unexpected events (for example, the average speed at which the insured drives is different from the initially estimated value), or in corrections resulting from the emergence of new factors, either because they have become more important over time or because they have appeared as completely new.

All of the above are part of a complex process, constantly being reorganized, meant to react "now" and "here" to everything that means information, that came both at the beginning and during the monitoring process presented above. This whole system will evolve and be "fed" with information, permanently solving the suite of mathematical and statistical equations, all with a dual purpose: to meet the requirements of customers, shareholders and regulators and to simplify the entire system so that information and results become self-sufficient on a healthy basis in which actuaries will of course continue to play an important role.

English translation by Irina GHETU

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The Romanian Actuarial Association (ARA) was founded in 2000, by group of actuaries and other enthusiastic professionals from various fields. ARA's main objective is the recognition, support and promotion of the actuarial profession in Romania, as well as the affirmation and protection of the rights of all actuaries and other assimilated professions carrying out services in Romania.

ARA is a full member of the European Actuarial Association ( and the International Actuarial Association (