Chapter 24 - Pricing & Financing Strategies Flashcards
Determining the Cost of Benefits
Cost of benefits can be described as the amount that should be charged to meet the benefits ( Risk premium )
Office premium = Value of benefits + Value of expenses + Profits
Other factors also need to be taken into account such as:
- commission
- cost of any capital supporting the product
- margins for contingencies
- the cost of any options and guarantees
- basis that will be used to set future provisions for the liabilities – as this may be different from the basis used to determine the cost ( most countries have moved to best estimate for provisions and premium setting )
- use of experience rating to adjust future premiums
- investment income
- reinsurance costs
Determining the Price of Benefits
Can be described as the amount that can be charged under a particular set of market conditions and may be more or less than the ‘cost’
Price might be different from cost due to:
- The provider’s distribution system for the product may enable it to sell above the market price or to take advantage of economies of scale and reduce the premiums charged.
- The provider may have a captive market such as an affinity group that is not price sensitive
- The provider may choose to sell a product that covers its direct fixed and variable costs but does not cover its expense overheads and minimum profit requirement. The purpose of the strategy is to stimulate sales of the product or other more profitable products. The company may expect greater profits across its whole product range. This is known as loss-leading.
- If there are only a limited number of providers in the market, demand may exceed supply and so higher premiums can be charged.
Determining the Incidence of Monies Paid
The 2 methods of financing benefits include :
Unfunded
- pay as you go
Funded
- Lump sum in advance
- Terminal Funding
- Regular Contributions
- Just in time
- Smoothed Pay as you go
Financing strategy will be influenced by:
- tax
- risk
