Premium risk

Category: Underwriting practice · Reviewed by Simon Temme, Account Executive · Last reviewed

Premium risk

Premium risk is the risk that premium received in respect of business already written but not yet earned, and business expected to be written in the next 12 months, proves inadequate to meet the resulting claims and expenses.

Components

• Unexpired risk on policies in force at the valuation date.
• New business expected to be written before the next valuation.
• Reinsurance recoveries projected on the same business.
• Expenses projected on the same business.

In the SCR standard formula

Under the Solvency II non-life underwriting risk module, premium risk is parameterised by:

• The premium volume measure (Article 116 Delegated Regulation).
• The standard-deviation factors by line of business (Article 218).
• The aggregation between premium and reserve risk via correlation (typically 0.5).
• Geographic diversification factors.

For internal models, premium risk is typically modelled by frequency-severity simulation conditional on the projected business mix.

Premium risk vs reserve risk

Aspect	Premium risk	Reserve risk
Time period	Forward — next 12 months	Backward — already incurred
Driver	Pricing adequacy + UW cycle	Reserve adequacy + emergence
Reducible by	Pricing discipline, reinsurance	Reserving discipline, ADC
Dominant in	New / growing lines	Mature / long-tail lines

References

• Solvency II Delegated Regulation 2015/35, Articles 116, 218.
• IFoA capital modelling guides.

Cross-references

• Reserve risk
• Solvency capital requirement
• Standard formula Solvency II

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