Rate adequacy
The ratio between the premium actually obtained and the technical premium deemed necessary to reach the target return, the indicator by which an underwriter measures whether it sells its risk at the right level, not just at a higher price.
Rate adequacy compares, for a risk or a portfolio, the premium actually written with the technical premium, that is, the premium that would cover expected losses, expenses, the cost of capital and the target margin. A ratio of 100 percent means the risk is sold at exactly the price that meets the profitability target; below it, the underwriter accepts giving up margin, above it, it gains margin. The indicator usefully complements rate change, which measures only the year-on-year movement in price: a 10 percent increase on a risk sold at 70 percent of its technical price is still a losing account. Underwriting management uses it to steer through the cycle, refusing to go below an adequacy threshold in a soft market, and to decide each line's share of the portfolio. Its reliability depends entirely on the technical premium, whose loss and trend assumptions may be too optimistic; a portfolio shown at 105 percent adequacy on wrong assumptions is a mispriced portfolio that believes itself well priced, and that is how the reserve strengthening of later years is prepared.
Textbook case: a liability account is renewed at 440,000 euros, against 400,000 last year, a 10 percent increase. The technical price recalculated with the new claims inflation trend comes to 550,000 euros: adequacy is only 80 percent, and the increase obtained is not enough to make the account profitable.
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