Chapter 19 - individual business Flashcards
Process involved in deriving a risk premium for PMI
- choose a base period over which to collect claims and exposure data
- collect data, checking the accuracy and appropriateness of the data
- split the data into homogeneous groups
- calculate historical burning cost premium for each group
- analyse data e.g. to identify trends
- adjust and project forward to obtain future risk premiums
Factors to consider when selecting a base period:
- volume
- detail
- trends
- relevance
- unknowns
Reasonability checks on data used to price PMI
- reconcile data to independent data sources such as financial statements and returns to the regulator
- check consistency between claims data and the benefits covered
- perform spot checks for impossible values and distributions
Significant distortions may arise for the following data:
- policy acceptance - the basis on which the proposal is accepted, underwriting, waiting period
- policy coverage
- marketing and method of distribution - influence of selling practice on the nature of risks insuredBCP
- delays in claims settlement - the internal practices that may affect the timing of claims settlement
BCP
True past risk premium of an actual portfolio of data ie the actual cost of claims incurred per policy
BCP = sum of claims/exposed to risk
Analysis of data
- more common to analyse claim frequency, cost per claim and exposure per policy separately
What may you need to adjust the base value for?
- unusually heavy/light experience
- large or exceptional claims
- trends in claims experience
- changes in risk
- changes in cover
- changes in the cost of reinsurance
- seasonal variation in claims
- incomplete claims
- change in agreements with suppliers
Changes in risk
- may show up as trends in the overall claims experience and could be dealt with as a trend
- may try to separate the major elements of risk in the base data, project them separately and combine them with explicit assumptions about the future mix of the risk
Projecting the base value for
- changes in policyholder profile by benefit options, considering selective effect of membership movement
- claims inflation
- trends
- other changes in cover
The projections need to allow for expected inflation on claims between:
- the mean payment date of claims in the base period
- the mean payment date of claims arising during the exposure period of the new rating series
What factors should contingency margins take into account
- benefit design
- number of policyholders and number of policyholders per benefit option
- policyholder risk class distribution and changes in policyholder profile
- overall risk exposure
- credibility of claims experience
- use of reinsurance
- likely variation in expenses
- impact of current and future changes in legislation
Cash plan premiums
- determined by first calculating the expected claims for each of the benefits
- expected benefit will take account of any excesses or coinsurance factors
- then adjusted to take account of “inertia” (if not already in claims experience data or expected to change)
Accidental death and TPD premiums
- based on calculating expected claims
- where sold to different groups, average rate is often agreed for a particular group
- large groups tend to be rated using “group” techniques
CI premiums
- sum individual CI incidence rate to determine overall rate
- overlaps in incidence of certain critical illnesses may be allowed for explicitly (more than one allowable CI cause underlies the same claim)
- automatic if rates derived from claims experience data
- situation harder if using medical records
Accelerated CI insurance premiums
- approximation to incidence pg.704
