Chapter 33: Pricing and Financing Strategies Flashcards
Cost of benefits
The amount that should theoretically be charged for them.
Premiums should be calculated as…
The value of benefits and expenses plus a contribution to profit.
Premiums/contributions should allow for… (12)
- theoretical value of the BENEFITS to be provided
- value of the EXPENSES that will be incurred
- contribution to PROFIT
P - PROVISIONING bases
E - the use of EXPERIENCE RATING to adjust future premiums R - REINSURANCE costs O - OPTIONS and guarantees T - TAX I - INVESTMENT income C - COMMISSION - COST OF CAPITAL - CONTINGENCY MARGINS
Price of benefits
The amount that can be charged under a particular set of market conditions and may be more or less than the cost.
3 Factors influencing the price
- distribution channels employed
- level of competition in the market
- premium frequency
Main methods of financing benefits
- Pay-as-you-go (unfunded)
- FUNDED:
- lump sum in advance
- terminal funding
- regular contributions
- just-in-time funding
- smoothed pay-as-you-go
2 Main factors affecting the cost of benefits
- frequency of occurrence (affects the timing of the benefits)
- severity (affects the amount of the benefits)
2 ways of viewing a product price
- Factor a profit criterion into the pricing process, and thus calculate the resultant premium. Test whether the premium is acceptable in the market.
- Input the desired premium into the pricing model and calculate the resultant profit. Test whether this is acceptable to the company.
4 Examples of distributions systems
- independent intermediaries
- tied agents
- own sales force
- direct marketing
Independent intermediaries
Individuals who select products for their clients from all or most of those available on the market.
Tied agents
Offer the products of one provider or a small number of providers.
“own sales force”
Usually employed by a particular provider to sell its products directly to the public.
Direct marketing
Press advertising, over the telephone, internet or mailshots.
Financing
A term used for putting a price on benefits payable on future contingent events, primarily in the context of benefit schemes.
The section looks at the timing (or incidence) of monies paid in, ie contributions.
Unfunded
Find the money to pay for the benefit as the benefit falls due.