24. Pricing and Financing Flashcards
Cost of benefits
Theoretical amount that can be charged
Factors influencing cost
- Tax
- Commission
- Cost of capital
- Contingency margins
- Options and guarantees
- Provisioning bases
- Experience rating
- Investment income
- Reinsurance costs
Price of benefits
Amount that can be charged under a particular set of market conditions
Factors influencing price
- Distribution channels used
- Competition
- Method of expense and profit loading
- Presence of captive market not sensitive to price
Testing robustness of premium
- Profit testing
* Market testing
Testing acceptability of premiums
1) Factor profit criterion into pricing > calculate the premium > market test
2) Input desired premium into pricing model > calculate the profit > test acceptability to company
Approaches to expense and profit loading
- Marginal costing
* Loss leading
Methods of financing benefits
- Funded- monies set aside to cover benefit costs to some extent before benefit falls due
- Unfunded- Paying for benefit as it falls due
Unfunded financing (Pay-As-You-Go)
Examples:
- Company paying for motor repairs as they arise
- State benefits
- If the period of cover is short, each contribution may purchase cover until the next contribution is due
Funded
- Lump sum in advance
- Terminal funding
- Regular contributions
- Just-in-time funding
- Smoothed PAYG
Factors affecting financing strategy
- Tax systems
* Way in which strategy affects the allocation of risks between individual and provider
Contributions for DB scheme
- Calculated rate set to meet the value of future benefits and expenses.
Actual rate = Calculated rate + Variation
Reasons for variation component in the actual contribution rate for DB scheme
- Shortfalls/surpluses in the scheme
- Sponsor may want to change pace of funding
- Legislation
Lump sum in advance
Set aside money expected to meet full liability as soon as the promise is made
Terminal funding
Money set aside when benefit starts to be paid
