A Haunting Actuarial Analysis – Part I

By Rick Gorvett
Posted on

Careers rarely unfold the way you had originally anticipated.  Take the following hypothetical:

After graduating from college, you begin a position as Actuarial Analyst for a major property-casualty insurance company.  You work for a few years, passing actuarial exams regularly, achieving an ACAS designation (with the FCAS right around the corner!), and getting very positive performance reviews. 

One day, the Chief Actuary calls you into her office and says, “We love the work you’ve been doing, and we think you’re ready for a new challenge.  I’m appointing you the sole actuary of a brand new business unit, Halloween Monster Liability.  Apparently, many monsters have significant assets to protect, so there is an emerging market for monster liability policies.” Monster Insurance.PNG

You smile knowingly, and cheerfully say “Good one!”  But the Chief Actuary just frowns and gives you a quizzical look. You realize your mistake, and stammer, “Oh, uh…  you’re serious!”

She nods.  “Darn right I’m serious!  This idea came right out of our new Innovation Lab, and it’s one of the top priorities of our CEO.  We’re going after this market in a big way – we’re all in!  And you’ll be the key: determining appropriate prices and risk relationships for the eight types of monsters we’ll be insuring, so this new venture will be profitable.” 

She hands you a sheet of paper with the list of the eight monster classes.  “There’s no good formal historical loss database available, of course – but plenty of anecdotal information and evidence.  I’d suggest you start by ranking the riskiness of each monster class relative to the others.”  She stands up and shakes your hand.  “This is a great opportunity for both you and the company.  Don’t let us down!”

Your head spinning, you leave and eventually find your way back to your office and plop down in your chair.  You look at the sheet of paper listing the eight categories of monsters for which you must now begin the process of risk classification for ratemaking purposes: 

  • Dracula / Vampires                           dracula.png
  • Frankenstein’s Monster                   frankenstein2.jpg
  • Ghosts                                            Ghost.png
  • The Grim Reaper                             Grim Reaper.jpg
  • The Mummy                                     Mummy2.jpg
  • The Wolfman                                    wolf.png
  • Witches / Wizards                              Witch-Cross-Stitch-Chart-preview.png
  • Zombies                                             zombie.png

 First, as the Chief Actuary suggested, you decide to try to rank these according to relative riskiness.  You pull out a pad of paper, and start jotting down ideas, starting with general context. 

You know the following:

  • The “risk” of each monster could manifest itself in numerous ways: injury or death to persons, emotional trauma, property damage – and then, of course, emerging from these could be business interruption, lost wages, etc.
  • Insurance premiums must be sufficient to cover expected total loss (plus a risk load), and for each policy, total loss will be a function of frequency, severity, and the level of exposure.
  • Each of these types of monsters has specific characteristics that should help you to evaluate the relative risk potential, in terms of frequency, severity, and exposure.

 “Whew,” you mumble to yourself.  “I’m gonna need some help with this.”  You decide to survey your colleagues for their impressions of the relative riskiness of the eight monster classes.

And indeed, that’s what I have done: surveyed my colleagues on the CAS Office Staff.  But before I present the overall results, you might want to take a few minutes to think about your own monster riskiness ranking.  Go ahead – I’ll wait.

Part II will be coming out on Halloween so stay tuned!

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