Chapter 24: Pricing and financing strategies

Question 1

Factors affecting cost of benefit: TIERCCCOP/ ICC COPTER

Answer 1

Tax
Investment income 
Experience rating – adjust future premiums - how was the actual claim experience? better or worse than
Reinsurance cost
Commission – possibly expense? 
Cost of capital – still to be covered 
Contingency margin
Options + Guarantees 
Provisioning bases – cost of establishing solvency capital, becomes positive a termination-- cost of capital
 expected? (connect to data chapter)

Question 2

Factors affecting the Price: DiCPAP

Answer 2

Distribution channels used
The level of competition in the market
The approach taken to expense and profit loading (marginal costing, loss-leading)
The provider may have a captive market that is not price sensitive (Hence the provider can charge what they want, with restrictions from the regulator)

Question 3

Factors to consider when assessing premium rates MOP CLaP:

Answer 3

Profitability
Marketability
Cross-subsidies 
Lapse rates
Policy terms

Question 4

Factors affecting the marketability ICE:

Answer 4

• Internal issues: Product quality, reputation etc
• Competitors’ actions
• External environments (economic situation, trends, policy changes)

Question 5

Factors to consider when assessing premium rates MOP CLaP:

Answer 5

• Profitability
• Marketability
• Cross- subsidies
• Lapse rates
• Policy terms

Question 6

Forms of funded products JuSTLuReT

Answer 6

Just in time funding
Smoothed PAYG
Terminal funding
Lump sum advance
Regular contributions
Tax

Question 7

Factors to consider when choosing a financing method FLiRTS SORRi

Answer 7

Flexibility of the contributions 
Liquidity needs of sponsor
Realism of method 
Tax incentives
Stability of contributions needed
Security of the benefits 
Opportunity cost of funding method - none for PAYG
Regulation
Risk allocation - sponsor vs. beneficiary

Question 8

Advantages of PAYG method WTF ExO

Answer 8

No need to wait for contribution accumulation to provide benefits
Lower transaction costs
Funds not tied up
Easier to Organise the payments of benefits
Experience cannot cause difference between contributions and benefit

Question 9

Benefits of funding in advance

GASER T

Answer 9

Gives security to members
Avoids sudden and unexpected cash calls that could cause liquidity problems
Smooths costs
Expected by members to fund in advance
Required possibly by legislation
Tax advantages