21. Pricing (3) - Other considerations Flashcards
Profit criteria
- NPV
- discounting profit signature at the risk discount rate
- subject to law of diminishing returns
- says nothing about competition
- expressed in relative terms, such as proportion of initial sales cost, total discounted premium
VNB margin = NPV/ discounted premium income - IRR
- rate of return at which discounted cashflow is zero
- might not exist/ be unique
- cannot be related to other indicators such as sales cost/ premium income
- DPP
- policy duration at which profits that have emerged so far have a present value of zero
Marketability
Premiums (charges) will be considered for marketability
This might lead to reconsideration of
- product design
- distribution channel used
- company profit requirement
- whether to proceed with product launch
Competitiveness
- premium will be tested against market
- rating factors need to be consistent with competition to avoid/ reduce anti-selection risk
Impact of competitor pricing on the insurer depends on
- market structure (supply)
- sales channel
- features of the product
- availability of comparison quotes
Volume
- fixed expenses are charged to policies in accordance with volume
- premiums may need to be reduced to secure sufficient volumes against competition
Margins
- margins may need to be waived for some products (loss-leading) and increased for others
- risk that this cross-subsidy approach is that the mix of business will differ adversely from expected
Reviews
Investigations relating to premium rates
- monitoring assumptions for pricing new business
- monitoring assumptions for reviewable premium business
- whether reserves set up to cover losses from loss-leaders are adequate
Reviews
Investigations relating to premium rates
- monitoring assumptions for pricing new business
- monitoring assumptions for reviewable premium business
- whether reserves set up to cover losses from loss-leaders are adequate
