Principle Controlling the Cost of Float

Principle controlling the cost of float

Underwriting- what risk to accept

Whole operation before investment income (premiums, claims, loss adjustment expenses)

Evaluate the risk

Data to help remote loss

High frequency, low severity- tail events, black swan

Willing to walk away from business

Limit the business they accept

They ceaselessly search for possible correlation among seemingly unrelated risks

Aggregation of losses and correlation you didn’t expect

3rd is true for everything- don’t do business with bad people

experience versus exposure- most important

explain experience and exposure and provide examples

look at past

experience is starting point for underwriting

d&o- pay when stockholders sue

fewest claims, most exposure

Float- money we hold but don’t own

Premiums are received before losses are paid, an interval that sometimes extends over many years. During this time the insurer invests the money.

The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay.

Cost of float-

This leaves is running an “underwriting