Insurance Products Ratemaking and Insurance Company Financial Solvency Ratio Calculation via Potential Deviation Ratio Method

Document Type : Research Paper

Authors

1 Associate Prof., Department of Financial Management and Insurance, Faculty of Management, University of Tehran, Tehran, Iran

2 Associate Prof., Department of Insurance, ECO College of Insurance, University of Allameh Tabataba'i, Tehran, Iran

3 Ph.D. Candidate, Department of Finance, Faculty of Management, University of Tehran, Tehran, Iran

Abstract

Objective: The goal of this research is to calculate the amount which must be paid for a fair premium based on the principle of equity and the financial solvency ratio of an insurance company based on the principle of equivalence, via potential deviation ratio method as a new method. Methods: The aggregate loss variable has been derived from Severity and Frequency of the losses. In this method, first the actual statistical distributions of these variables are estimated and then the fair premium is calculated based on the principle of equity. Next, the amount of potential deviation ratio, which is required to increase the financial solvency margin of the insurance company, is calculated. The model for calculating the premium, as well as the more precise concept of financial solvency of the insurance company that is provided in this research, is based on scientific foundations and can be used as a new method for all insurance fields. Results: The results of this research show that the calculated amount of premiums and potential deviation ratio that is required to increase the financial solvency ratio of the insurance company, by estimating the actual distribution of frequency and severity of the claims compared with when these variables are assumed to be normal distributed, are different. The difference is especially important in the higher levels of confidence. Conclusion: It can be concluded that in the case of calculating premiums and potential deviations based on assuming the normal distribution for the data, the real financial solvency ratio would be different from the apparent calculated financial solvency ratio of the insurance company. Furthermore, lacking the ability to precisely price the premiums may cause the insurance company to quickly fall down to bankruptcy. 
 

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Financial Research Journal
Volume 21, Issue 2
2019
Pages 165-186

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