Theory 177/Insurance cycles/Ratio lens
Premium Is Risk Against Capital
The claim
Premium adequacy is set by the ratio of expected loss to capital held, so the same risk supports a different premium in differently capitalised insurers.
01Mechanism
Capital determines how much risk can be retained per unit premium; the ratio sets the required margin.
02Prediction
Premiums should track the ratio.
03Refutation
Premiums tracking loss history would remove capital.