Anchoring on the expiring premium
The tendency to price a renewal as a change from last year's price rather than from the cost of the risk, which carries past errors forward.
At renewal, negotiation is almost always about a change: plus five, minus three percent on the expiring premium. That frame sets an anchor in the sense Amos Tversky and Daniel Kahneman described in 1974: an initial figure, even an arbitrary one, pulls the final estimate toward it. If the expiring premium was inadequate, an increase deemed bold can leave the risk below its cost for years, and an underwriter reporting an average eight percent increase can thus write a portfolio that remains loss-making. The remedy is to compute the technical price first without looking at the expiring, then to measure the gap, which price adequacy indicators make visible. Lloyd's made that gap a supervisory matter when in 2018 it required remediation plans for the least profitable segments of its syndicates.
In the Tversky and Kahneman experiment published in Science in 1974, a rigged wheel stopped at 10 or at 65 before participants were asked the share of African countries in the United Nations. The median estimates were 25 percent for the former and 45 percent for the latter: a number unrelated to the question had moved the answer by twenty points.
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