Chapter 19: Individual Pricing

Question 1

What is the pricing process?

Answer 1

BDSBAP

Base- choose the base
Data - collect the data
Split the data into homogenous groups
Burning rate - calc hist BR
Analyse the data
Project- adjust the base and project forward

Question 2

What are some data considerations when you choose your base?

Answer 2

1. Volume- there must be sufficient volume to ensure credibility
2. Detailed- there must be enough detail with relevant rating factors
3. Trends - long enough period to see trend
4. Relevance - the data must be relevant to the present and the future (any planned change in contract).

Question 3

What are some distortions from using external data?

Answer 3

1. Policy acceptance
2. Risks covered in policy may be different
3. Marketing and dbn methods may differ
4. Delay in claims settlement

Question 4

How would you split exposure and claims data?

Answer 4

1. Split exposure data {PHS) by: age, gender, smoker status, family size, education, income, occupation, industry, location, disease profile
2. Split claims data by: in-patient hospital (further split = ward fees, theatre fees, medicine, doctor) | out-patient hospital | chronic condition | day-to day medical expenses

Question 5

What are some ways that you would adjust the base data?

Answer 5

1. Adjust for factors affecting relevance of past data & change in insurers practices
2. Adjust by allowing for:
   a. Trends
   b. Change in cover (treatment, underwriting, pre-authorisation)
   c. Risk profile
   d. Change in reinsurance

Question 6

What loadings are added to the risk premium to get the office premium?

Answer 6

Expenses
Commission
Solvency margin
Stat reserves investment income
Risk margin
Profit margins

Question 7

What modelling considerations (for complications) need to be made for PMI?

Answer 7

1. Estimating distribution of claim frequency (depends on duration, age, gender, time of year, occupation)
2. Estimating distribution of claim amount (hospital capacity, medical science innovation, provider deals, inflation)
3. Impact of sales tax on future growth
4. Macroeconomy
5. Style of government
6. Level of market competition

Question 8

What are some other modelling complications for PMI?

Answer 8

NCD (system may not be able to handle this)
Recouping of initial costs in the pricing model
Modelling chain of occurence (GP-specialist- hospital)

Question 9

What are some data limitations for PMI?

Answer 9

1. Absence of insurance statistics (pooled industry data)
2. Family cover- individuals details unknown
3. Group - details of individual can only be estimated

Question 10

What are some modelling complications for CI?

Answer 10

1. Estimating a different distribution for each disease
2. Advancement of medical science (prevention reduces claim rates, cures do nothing)
3. Earlier diagnosis (increase claims)
4. Simpler and readily available operations (increase treatment based claims)
5. Separate model for treatment based and disease based
6. Guaranteed and reviewable alternatives

Data limitation
Not enough data

Question 11

What are some modelling complications for LTCI?

Answer 11

1. Estimating dbn of claims freq- too little experience
2. Estimating dbn of claim amounts (economy, inflation, capacity)
3. Demand
4. Advances in medical science
5. Inflation of care costs
6. Data limitations