Chapter 10: Establishing the Price: Pricing Factors Flashcards
Define ‘risk premium’
The expected ultimate cost in claims of the risk being accepted- aka the premium required to cover the total cost of claims today
Define ‘frequency’
The expected number of claims
Define ‘severity’
The expected size of the claim (how expensive it is)
Define ‘large claims’
A large claim, which can disproprtioantely affect pricing and profitability
What is a PPO?
A periodic payment order, often used for large claims with personal injury elements. These can be expensive due to admin costs and the lifespan of the claimant.
Define ‘reinsurance cost’
The cost of reinsurance protection from a cat loss
Define ‘claims run off’
The adjustment of claims reserves around how much the claim may cost
Define ‘IBNR claims’
Reserving for claims events which may have occurred but have not been reported yet
Define ‘catastrophe claims’
An accumulation of a large number of claims, all arising from a common event
Define ‘latent claims’
An extreme form of IBNR
Define ‘claims inflation’
Inflation in the value of claims paid out
Define ‘exposure’
Where the companies risks are exposed today. This may change from historical exposures due to changing working practices or underwriting appetite
Define ‘fraud’
Application fraud and claims fraud
Define ‘expenses’
Cost of running an insurance business. Can be either fixed or variable expenses
What are examples of variable costs?
The extent of underwriting involved, the comission charged, and the claims handling
Define ‘commission’
The amount paid to the sagent, intermediary, or broker who introduces business to the insurer
Define ‘return on capital employed’
The return on your capital. Libility lines need higher ROCE to justify their greater volatility
Define ‘investment income’
Income earnt by investing money reserved to pay future claims
Define ‘combined operating ratio’
The loss ratio, the comission ratio, and the expense ratio
What kind of investments do insurance companies invest in?
Interest bearing investments, and investments which can be expected to grow in line with the economy (equities)
Define ‘premium taxes’
Taxes on premium. These come in pure forms, like IPT, and quasi taxation through levies.
Define ‘insurance premium tax’
Tax paid on insurance premium. Standard of 12%, higher of 20%
Define ‘financial services compensation scheme levy’
A surcharge based on a percentage of gross direct premium, to fund claims made by people whose insurer has become insolvent.
Define ‘motor insurer’s bureau’
The insurer of last resort for PD by an ininsured driver. There is a levy to pay based on claims experience
