10 - Establishing the Price - Pricing Factors Flashcards
How can risk premium be defined?
The expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty.
(Essentially it is the amount required to pay claims)
What is a claims run-off?
Changes in claims reserves or claims being re-opened due to more information becoming available or court rulings on liability.
What are latent claims?
Claims that takes many years to be reported. An example is mesothelioma from asbestos - some claims are being made for incidents which occurred 40-50 years ago.
Also called long tail claims.
Similar to INBR but much more time has elapsed.
What is meant by INBR?
Incurred but not reported.
Estimated reserves based on expected claims for events that have occurred but not yet been reported to the insurer.
How should claims data be adjusted to reflect exposure?
They should be adjusted to reflect exposures today. Claims data is historical and must be viewed within that context.
For example in many industries technological advancements have automated some processes which previously would have been risky. Therefore, it would not be accurate to price the risk based upon historical claims.
What is claims farming?
Where a company (eg claims management company) or person encourages another to make a claim.
What are the 4 main factors to take into consideration when setting the price?
- Risk premium (claims payments)
- Expenses
- Profit
- Taxes and levies
What are the two categories of expenses?
Fixed and variable
What are some examples of variable expenses?
Underwriting
Risk management/surveys
Commission
Claims handling
Risk management funds
Low claims rebates
What is meant by return on capital employed?
The profit as a percentage of the capital employed
Is the proportion of total account premiums which must be kept as free reserves to ensure that an insurer can meet its claims obligation.
What is investment income?
Insurers control a large amount of capital in the common pool. Whilst they must retain certain levels of reserves they can also invest some capital, usually in low risk areas, which gives them another source of income.
What is meant by “underwriting result” and what measures this?
The actual profit or loss of the insurer without taking investment income into account, as measured by the combined operating ratio.
What is the combined operating ratio (COR)?
A combination of the loss ratio, commission ratio, and expense ratio
What does the COR measure?
The underwriting result. Essentially the financial health of the insurer.
(COR = combined operating ratio)
What is a hard market?
When rates and premiums are increasing as a result of less capital in the market.
What is a soft market?
When rates and premiums are decreasing in order to attract business.