Ch 24: Pricing and financing strategies Flashcards
What is the difference between the cost and the price of a set of benefits?
2
- The cost of benefits is the amount that should theoretically be charges for them based on frequency and severity.
- The price of benefits is the amount that can actually be charged under a particular set of market conditions. It may be more or less than the cost.
How are premiums calculated?
2
- Model is developed to determine theorethical values of benefits
- Value of premiums = value of benefits + value of expenses + contribution to profit
List other factors to consider when calculating a premium
9
- tax
- commission
- the cost of any capital supporting the product
- margins for contingencies
- the cost of any options and guarantees
- the provisioning basis
- experience rating
- investment income
- reinsurance
Influence of regulation
3
- Move to risk based capital requirements, so solvency capital increases with amount of risk benefits have and cannot be used for any other purpose.
- This increases overal lcost of benefits as there is now a cost of capital component that needs to be added (opportunity cost)
- Solvency capital is released over lifetime of a policy as no longer needed
Robustness of premiums
3
- Profitability is checked by comparing actual and expected experience using profit testing models
- Scenarios tested use stoch simulations to determine min level of profitability in the tail of distribution
- eg profits in 95% of all scenarios
Factors influencing the price of benefits
5
- Distribution channels enable above market price
- Economies of scale: reduce premiums charged
- Captive markets: No sensitivity to price changes
- Loss leading products: NUB sales cover direct costs but not profits and overheads in order to stimulate sales of mor profitable products
- Supply < Demand
DECLanS
Marginal costing
4
- Variable costs: Policy related costs
- Fixed costs : Management and overheads
- Aim is to let existing business cover fixed costs so NUB only needs to cover variable costs to make a profit
- Allows only variable cost margins to be included, makes price of benefits cheaper @ NUB
Examples of distributions systems
4
- independent intermediaries
- tied agents
- own sales force
- direct marketing
Independent intermediaries
Individuals who select products for their clients from all or most of those available on the market.
Tied agents
Offer the products of one provider or a small number of providers.
“own sales force”
Usually employed by a particular provider to sell its products directly to the public.
Direct marketing
Press advertising, over the telephone, internet or mailshots.
Financing strategies
3
- Financing: putting a price on benefits payable on contingent events
- Unfunded: PAYG, find money for benefits as due ++Risk
- Funded: Money to fund benefits set aside in advance
List 6 ways of financing pension scheme benefits
- Pay as you go (unfunded)
- Smoothed pay as you go(funded)
- Terminal funding(funded)
- Just in time funding(funded)
- Regular contributions (funded)
- Lump sum in advance (funded)
Pay-as-you-go
Benefits are met out of current revenue and there is no funding
Unfunded