Technical price
The premium an insurer calculates as necessary to pay a risk's expected losses, expenses and cost of capital, before any commercial negotiation.
The technical price is the premium that, according to the insurer's models and assumptions, exactly covers the expected cost of claims, acquisition and administration expenses and the return on the capital the risk ties up. It differs from the market price, set by competition and the cycle, and from the price actually written, which results from negotiation. The ratio of written to technical price, tracked risk by risk and then aggregated by underwriter and by line, is one of the most closely read indicators in an underwriting department: a ratio below one hundred percent is not forbidden, but it becomes a decision, which must be reasoned and dated. The technical price is not the truth: it inherits the biases of the models and trend assumptions, and a whole market can be wrong together. It remains the fixed point that makes it possible to know, later, whether a loss came from the risk or from the price accepted.
Hypothetical case: for an industrial risk, the technical price comes out at 120,000 euros. The contract is written at 102,000 euros to keep the client: the adequacy ratio is 85 percent. The underwriting note records the gap and its reason, and that is what will be reread if the risk has a loss.
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