Insurer's Risk: A Restatement

One of the most important concepts with which the insurance student must become familiar is that of insurer's risk. The classic treatment of that concept in the American insurance literature appeared in a 1964 article in this journal by David B. Houston.' That article has served as the basis for several textbook treatments of insurer's risk and has provided material for numerous classroom presentations. Consequently, the Houston article has made a major contribution to insurance education and rightly deserves its status as a classic article in the field. As with any widely read article of a technical nature, however, the Houston article has given rise to a certain amount of misunderstanding on the part of textbook writers and lecturers and hence on the part of insurance students. It has been the observation of this author that most of the problem with the article seems to stem from the concept of insurer's risk. Consequently, the purpose of this article is to restate Houston's treatment of insurer's risk in such a way as to mitigate the misinterpretations which have arisen. The article then extends the development to point out some additional implications of the concept.