Chapter 24: Pricing and financing strategies Flashcards
Factors affecting cost of benefit: CEP TIERCCCOP/ ICC COPTER
Calculated value of the benefits
Expenses
Profit margin
Tax / Testing - Profit and Market testing
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)
Factors affecting the Price: DiCL PEP / PEP FLUD MC / DROP LECa PUG
Distribution channels used
The level of competition in the market
Loss leading
The approach taken to expense and profit loading (marginal costing, loss-leading)
Economies of scale
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)
Profit and expense loading
Economies of scale
Price sensitivity
Financing strategy
Loss leader
Underwriting cycle level
Distribution channel used
Market strategy
Cross subsidies
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Distribution channel used
Regulation may enforce price floor or sealing
Office Premium = pure risk premium/ Benefit size + expenses loading + commission + contingency loading + profit loading + investment income +
additional: Loss leader Economies of scale Captive markets Pricing sensitivity Underwriting cycle Group cover agreements
Factors to consider when assessing premium rates MOP CLaRP/ AMPLE
Profitability Marketability Cross-subsidies Lapse rates Risk groupings / Rating of clients Policy terms - rates review, PRE
Factors affecting the marketability ICE:
- Internal issues: Product quality, reputation etc
- Competitors’ actions
- External environments (economic situation, trends, policy changes)
Forms of funded products JuSTLuReT
Just in time funding Smoothed PAYG Terminal funding Lump sum advance Regular contributions Tax
Factors to consider when choosing a financing method FLiRTS SORRi
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
Advantages of PAYG method WTF ExO
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
Benefits of funding in advance
GASER T
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
