P & C insurers invest the majority of their

assets in long-term securities, although

the proportion held in common stock is
lower than that of life insurance
companies.
m á set-aside reserve that contains the
portion of a premium that has been paid
at the start of the coverage period
 P & C underwriting risk results when the
premiums generated on a given
insurance line are:
1. the claims and (losses) incurred insuring
the risk
2. the administrative expenses of providing
that insurance coverage after taking
the account
3. the investment income generated
between the time when the premiums
are received to the time when losses
are covered.
ëhus, underwriting risk may result from:

1. unexpected increase in loss rates

2. unexpected increase in expenses
3. unexpected decreases in investment
yields or returns
 ëhe key to feature of claims loss risk is the
actuarial predictability of losses relative
to premiums earned.
m Property versus Liability:

ëhe maximum levels of losses are more

predictable for property lines than for
liability lines.

m Severity versus Frequency:

Loss rates are more predictable on low-

severity, high-frequency lines than on
high-severity, low frequency lines.
m Long tail versus Short tail:

Long tail loss -> arises in policies for which the

insured event occurs during a coverage period
but a claim is not filed or made until many
years later.

m Product inflation versus Social inflation

Loss rates on all P & C property policies are

adversely affected by unexpected increases in
inflation.

ëhe inflation risk of property lines is likely to

reflect the approximate underlying inflation risk
of the economy.
Social inflation has been particularly
prevalent in commercial liability and
medical malpractice insurance and has
been directly attributed by some analysts to
faults in the U.S civil litigation system.

Loss ratio -> measures the actual losses

incurred on a specific policy line. It
measures the ratio of losses incurred to
premiums earned.

Premiums earned -> premiums received

and earned on insurance contracts
because time has passed without a
claimed being filed.
m ð
ð 
-> is based on the pooling of risks

m á reinsurer diversifies risk of the

individual policies by writing many
unrelated policies for different insurance
companies, so that the potential overall
loss from the pool of reinsurance policies
is small relative to the reinsurer·s capital.