24. Pricing and financing strategies TODO

Question 1

What is the difference between the cost and the price of a set of benefits?

Answer 1

• Cost of benefits=> Price theoretically be charged
• Price of benefits=> Price that can actually be charged for benefits under a particular set of market conditions.
• Price of benefits may be more or less than the cost

Question 2

What can the premium charged to a customer be broken down as?

Answer 2

• Value of premium= Value of benefit+ value of expenses+ contribution to profit+ other factors

Question 3

What are the other factors?

Answer 3

• Tax
• Commission (if not already included as an expense)
• Cost of any capital supporting the product
• Margins for contingencies
• The cost of any options or guarantees
• The provisioning basis
• Experience rating
• Investment income
• Reinsurance

Question 4

When using a profit testing (cashflow modelling) approach to determine a premium, what cashflows would be needed in respect of the provisions and the SCR?

Answer 4

• Inc in provisions and SCR= negative cashflows
• Investment return => Provisions+ SCR=> Positive cashflow

Question 5

What is the impact of a high SCR on the emergence of profits?

Answer 5

• Defer emergence of profits
• Cost of establishing such Cap will be greater at the beginning of the contract
• But releases of capital will be greater later in the life of a contract
• Total profits emerging do not depend on the SCR
• Timing of emergence changes
• Deferral of emergence of profits=> Lower NPV of profits
• IF discount rate> assumed future investment return
• Result in a greater premium if a given profit criteria is being targeted

Question 6

Why might the price charged differ from the cost of an insurance project?

Answer 6

• Providers distribution system=> may enable it to sell above the market price
• Or take advantage of economies of scale and reduce the premiums charged
• Provider might have a captive market=> affinity group- not price sensitive
• Marginal costing=> provider taking a lower or no contributions to expense overheads or profits=> cheaper price
• Loss leader=> cheap product attracts customers to other more profitable products of the company
• Underwriting cycle=> limited number of providers in the market=> higher premiums o Large number of providers in the market=> Lower premiums charged

Question 7

What are the different ways of financing a pension scheme?

Answer 7

• Pay-as-you-go=> benefits are met out of current revenue and there is no funding
• Smoothed pay-as-you-go=>same as pay as you go but with a small fund to smooth effects of timing difference between contributions and benefits, short term business cycles and long-term population changes
• Terminal funding=> s lump sum set aside to cover all expected benefit costs when the first tranche of benefits becomes payable
• Just-in-time funding=> funds are set aside only in response to an external event such as sale of employer
• Regular contributions=> funds are gradually built up between promise and first benefit payment
• Lump sum in advance=> lump sum is set aside to cover the expected benefit costs when the benefit is promised

Question 8

Why might the actual contribution rate differ from the calculated theoretical cost of the future benefit payments in a pension scheme?

Answer 8

• Scheme may be in deficit=> V (A) < V (L accrued)
• Contribution rate may have to be increased to eliminate the deficit
• Scheme may be in Surplus=> V(A)> V (L accrued)
• Contribution rate reduced to eliminate the surplus
• Sponsor may want to alter the pace of funding=> paying a higher or lower contribution in any year
• There might be legislative restriction on contributions
• Upper and lower limits