Chapter 19.2 Pricing (3) Other considerations Flashcards
-Understand and apply the techniques used in pricing health and care insurance products in terms of: -group risk assessments.
Other impacts on pricing: overview
What other impacts need to be considered as part of the pricing process? (4)
- premium review
- competition
- impact of regulator
- impact of reinsurer
Reviews: intro
What are the three different types of investigations/reviews that can be done relating to premium rates? (3)
- regular monitoring of bases/assumptions used to price new buss
- regular monitoring of assumptions used for pricing reviewable premium business
- testing/monitoring adequacy of premiums for reserving purposes, especially assessing adequace of reserves which were set up to cover losses from loss-leaders
Reviews: regular monitoring, new business basis
Why is monitoring of new business bases important? (1)
In what way does the actuary ‘implement’ regular monitoring of new business sales? (2)
Where might the information be sourced that would lead to changes in new business assumption bases? (2)
Important because
- pricing of new business will require most up-to-date info
Actuary will keep all items in his assumptions set under review
- where any one of these assumptions is no longer valid, the effect of changing this must be tested against the existing premiums tariff to see whether the charging rate for new business need to be updated
Info leading to changes in assumptions may come from
- internal experience sources, or
- outside influences.
Reviews: regular monitoring, reviewable premiums, justification
Why would healthcare insurance providers sell contracts with reviewable aspects (eg reviewable premiums/reviewable charges)? (6)
Reasons for reviewable premiums
- the premium/charges may be subject to review on a regular basis and adjusted when overall experience is judged to have changed significantly
- particulalry for long-term contracts, if/when experience becomes adverse, reviewableness of contract allows insurer to correct the premiums/charges charged to be comensurate with risk
- hence reviewable contracts will likely have lower margins, hence lower premiums/charges than contracts with any ‘guaranteedness’
- reviews help avoid the potential large cost of guarantees (ie guaranteed premiums, guaranteed rates of benefit increases, etc)
- reviews may be used to undercharge initially (if premium is ‘discounted’ in order to accommodate portfolio development/cross subsidies
- suitable reserves/capital/high level of free assets are needed to support this
Reviews: regular monitoring, reviewable premiums, products
Which healthcare insurance contracts pose the greatest risk when regular reviews are not built onto the contract design? (2)
‘Reviewability’ of contracts usually refers to premiums charged; however, for unit linked contracts, what may be reviewed? (2)
Riskiest healthcare insurance contracts if reviews aren’t allowed
- in terms of the greatest risk, long term insurances with guaranteed terms need very careful consideration for discounted premiums/inadequate premium rates.
Unit-linked contracts
- can undergo review of charges OR review of premiums
Reviews: regular monitoring, reviewable premiums
What importance factors should be considered when deciding on premiums/charge for review purposes? (4)
Important factors when reviewing premiums/charges for contracts
- where an increase in premium/charges is called for, the actuary must be careful about how selective lapsing may come about
- premium/charge reviews must not encourage selective lapsing
- selective lapsing would erode the benefit of the review (by leaving worse group of lives/risks behind)
- in some areas, regulator may give ‘acceptable premium/charges review guidance’- this should be factored in
- other factors
- the costs of implementing the premium changes
- reasonable customer expectation
- market practice and competition
- cannibalisation against other products already sold
- existing clients vs new clients
Reviews: regular monitoring, premium adequacy for reserving purposes
In terms of reserving, what additional measure needs to be taken if health insurance contracts are ‘underpriced’ ie premiums/charges are lower than they should be? (2)
What impacts the reserving decision above? (2)
What implications arise regarding ‘underpriced’ health insurance contracts specifically in the case of long-term insurance contracts? (2)
Where policy is sold at less than full premium rate for expected claims and expense outgo,
- reserves will need to be set up to the extent the pricing basis is inadequate.
The size of the reserves will depend on:
- speed at which the premium can be reviewed up to its correct rate
- likelihood that policyholders will renew their contracts as the premium level is increased to it correct level
Where the inadequate rates apply on long term insuance on guaranteed terms
- there are serious considerations for the actuary responsible
- their course of action will depend on the codes of professional guidance in the territory where he/she is operating.
Competitveness: intro
What aspects related to competitiveness are important when setting the premiums/charges for group contracts (and even individual contracts in general) (5)
- premium tariff against market
- impact of competitor pricing on insurer
- need for volume
- margins
- return on capital
Competitveness: in depth, prem tariffs, volume
Consider the following aspects to be cosidered for health insurance contracts in the context of competitiveness
premium tariff against market (4)
need for volume (3)
Premium tariff against market
- premiums charged should be regularly checked vs competitors’ pricing approach for similar products
- cheaper competitor premiums => draw higher market share
- rating factors need to be consistent with competition to avoid/reduce anti-selection risk
- if competitor uses comparitively more detailed risk selection (rating factors) may attract higher proportion of healthy lives
Need for volume
- volume is important to cover fixed expenses; lower than expected volumes=> may need higher charge per policy=> less competitive
- premiums may need to be reduced in order to secure sufficient volumes against competition
Competiveness: in depth, impact of competitor pricing on the insurer
List some factors that influence the impact of competitor pricing on the insurer (6)
- market structure
- sales channel
- features of the product
- availability of product
- availability of comparison of quotes
- other features of the market
Competitveness: in depth, margins, ROC
Consider the following aspects to be cosidered for health insurance contracts in the context of competitiveness
margins (3)
return on capital (3)
Margins
- can adjust margin for competitiveness
- inadequate/lower premiums may be charged eg loss-leader product; however this must be compensated by large margin in other lines of business
- must monitor volumes => check as new buss enters, margins forgone in one line of business are covered by another line
Return on capital
- product lines should aim to meet return on capital requirements, taking all cross-subsidies/adjustments into account
- if ROC not met => serious grounds for withdrawing from that class of business
- also, excess return on capital may indicate pricing basis can be relaxed to encourage more volume
Regulators, pricing impact: intro
What aspects may regulators have on pricing? (2)
Regulators may impact
- pricing freedom
- cost impact
Regulators, pricing impact: pricing freedom
In what way may the regulator impact pricing of group contracts when it comes to pricing freedom? (8)
- role of regulator varies by territory
- pricing bases, premium rates, or rating factors can be put under direct control of the regulator
- where the insurer is seen as playing a role in provision of welfare payments it is likely the pricing basis for such insurance will be closely monitored by the supervisors
- indeed, basis may be totally prescribed
- the regulator can also affect pricing basis indirectly by restricting insurer operation
- eg single premium cost to all new subscribers (community rating), or
- ..inability to differentiate between risk cells (eg discrimination by gender)
- these will affect the pricing assumptions and hence the price that will be charged.
Regulators, pricing impact: cost impact
In what ways may the regulatory environment an insurer operates in lead to a cost impact on pricing? (4)
Any regulatory restriction on commercial operations may impose a cost that needs to be reflected in the premium assumptions. for eg
- a requirement to invest in local assets may impact the investment return that can be included in calculations.
- the need for the insurer to collect premium taxes will also necessitate a further expense loading in the premium basis.
- such additions should affect all insures in a market equally and thus should not affect competitive positions.
Regulators, pricing impact: cost impact, reserving/capital requirements
In what way do the reserving and capital requirements imposed by regulation impact pricing? (3)
- premiums rates should explicitly include the cost of holding the supervisory reserves and required solvency capital in the profit calculation
- the charge is the investment cost arising from holding the underlying assets as “locked-in” statutory capital rather than investing them directly in business acquisition
- SCR may be reduced by the use of suitable reinsurance arrangements
