Risk‐Based Premiums for Insurance Guaranty Funds

  • Author(s): J. DAVID CUMMINS
  • Published: Apr 30, 2012
  • Pages: 823-839
  • DOI: 10.1111/j.1540-6261.1988.tb02607.x

ABSTRACT

Insurance guaranty funds have been adopted in all states to compensate policyholders for losses resulting from insurance company insolvencies. The guaranty funds charge flat premium rates, usually a percentage of premiums. Flat premiums can induce insurers to adopt high‐risk strategies, a problem that can be avoided through the use of risk‐based premiums. This article develops risk‐based premium formulas for three cases: a) an ongoing insurer with stochastic assets and liabilities, b) an ongoing insurer also subject to jumps in liabilities (catastrophes), and c) a policy cohort, where claims eventually run off to zero. Premium estimates are provided and compared with actual guaranty fund assessment rates.

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