Liability pricing analytics. A pricing model for commercial liability risks
Pricing liability risk is challenging, not only because of the broad spectrum of risks involved but also because the risk landscape is constantly changing. Against this background, Swiss Re has been developing a pricing model for commercial risks, our Liability Risk Drivers model (LRD).
As with our Nat Cat model, LRD is also based on scenarios, which assess underlying risk factors and their interaction. Vital input for this pricing technique is forward-looking modelling (FLM), an exposure-based approach we use at Swiss Re to cost liability business. It essentially anticipates and incorporates changes in the liability risk landscape into the quantitative assessment of risks – without having to wait for claims to emerge.
These potential changes could take numerous forms, say, a fire or simply a defective product. The risk drivers we examine are, for example, the location of the insured, its industrial activities and the coverage provided by an underlying insurance policy. A Swiss Re sigma publication describes how data analytics can help examination of the occurrence and characteristics of fires by overlaying fire incidents on specific property locations.
"Insurers can then analyse the frequency of incidents for each company and assess its susceptibility to a variety of incident types, such as building structure fire, cooking fire, trash/waste fire, brush and grass fires."
LRD also takes into account likelihood of shifts in the risk environment and the company's business model. For example, in the past, we had been looking at the liability risks clients are exposed to when expanding their business into foreign markets and how they didn't have sufficient loss information available to calibrate their pricing models. Our LRD analytics model is able to generate this data. LRD also enables us to benchmark existing liability pricing assumptions with regard to a client's risk selection.