Chapter 19 - Pricing Individual Business

Question 1

Process of deriving a risk prem: (6)

Answer 1

1. Choose a base period over which to collect claims and exposure data
2. Collect data, checking the accuracy and appropriateness of the data
3. Split the data into homogeneous groups
4. Calculate a historical burning cost premium for each group
5. Analyse the data
6. Adjust and project forward to obtain future risk premiums

Question 2

What is the Burning Cost Premium?

Answer 2

It is the true past risk premium of an actual portfolio of data

Question 3

Factors that should be consideres when determining the appropriate level for the contingency margin (9)

Answer 3

1. Benefit design
2. Number of PHs
3. PH risk class distribution
4. Overall risk exposure
5. Credibility of claims experience
6. Use of reinsurance
7. Changes in managed care arrangements
8. Likely variation in expenses
9. Impact of current and future changes in legislation

Question 4

Define ‘inertia’:

Answer 4

People’s propensity not to claim even when they are entitled to

Question 5

Inertia arises for 2 reasons:

Answer 5

1. Individuals may buy the plan with a particular benefit in mind and tend to forget the rest of the cover provided by the policy
2. Size of benefits in absolute terms tends to be small, and this combined with ‘customer apathy’ leads to many otherwise valid payments not being claimed

Question 6

When pricing, what factors can lead to adjusting base values? (9)

Answer 6

1. Unussually heavy/light experience
2. Large or exceptional claims
3. Trends in claims experience
4. Changes in risk
5. Changes in cover
6. Changes in cost of reinsurance
7. Seasonal variation in claims
8. Incomplete claims
9. Change in agreements with suppliers