MichaelSchmichael

How Good are RiskMetrics' Tools?

Looking post hoc at the loss incurred versus premium collected with respect to a single loss is not a reasonable or fair way to determine the propriety of the premium. Almost any single insured loss will look improperly priced when viewed in that way. Only in the context of an entire portfolio, probably over an entire cycle, can the propriety of premium be fairly evaluated.

Actuarial analysis works reasonably well with life insurance, property loss, auto and a few other lines in which you have large, diverse pools of insureds and excellent long-term data. It is less than reliable when it comes to complex types of financial risk (D&O, E&O, surety), especially when the degree to which the individual insured risks will correlate is unknown. That said, and in the perspective of actual insurance (not CDS, which aren't technically "insurance"), $1.5M in premium for up to $1.3B in risk looks very low compared to how other types of complex risk is priced.