Chapter 7 Flashcards
Why is pricing needed?
So that the insurer can correctly:
* Pay out all future claims;
* Pay out all future expenses;
* Make some profit.
What is a office premium?
A premium covering all future cashflows of the policy
What is the EPV office premiums formula? with a risk margin
EPV(Office premiums)= EPV(Claims) + EPV(Expenses)+
EPV(Profits) + EPV(Risk margin)
What is the EPV office premiums formula, without a risk margin?
EPV(Office Premiums)= EPV(Claims)+EPV(Expenses)+EPV(Profits)
What assumptions need to be made in pricing assumptions
- Claim frequency / probability / number of claims;
- Average claim amounts;
- Future expenses;
- Investment returns.
What is the EPV of a claim formula?
EPV(Claim)= Probability of a claim ×
Present value of the amount of the claim.
What are the common expense a policy can incur?
Upfront costs
Regular costs
Claim costs
What are upfront costs?
Incurred at the outset of the policy and are usually high as a proportion of total cost. Covers: commission to brokers, upfront admin costs etc
Usually expressed as a fixed rand amount buy could be a percentage of office premium.
What are regular costs?
Often paid at the same time as the premium. Regular costs could be a fixed rand amount, or they could again be a percentage of the office premium, or the risk premium, or some other amount altogether - it depends on the policy design
What are claim costs?
Some policies will have a cost associated with each claim. This could
relate to validating the claim, or the administration of paying the
claim.
How is the risk margin calculated?
The risk margin will generally be expressed as a loading onto the
EPV(Claims), since it is basically an implied increase in claim num-
bers and / or value. So it can be valued as a simple increase of k to the
EPV(Claims), where k is the risk margin.
EPV(Risk Margin)= k × EPV(Claims)
Describe profit in terms of office premium
Profit is generally expressed as a percentage of the office premium.
The insurer will require that a certain percentage of each premium
paid contributes towards profits. So the profit is expressed as a per-
centage multiplied by the EPV of the premiums.
What is the risk premium?
Risk premium is the premium that is required from policyholders
known as the “net pre-
to cover the expected cost of claims only.
What is reserving?
Reserving is a process where the insurer is asked to put aside some
money to back policies which have been sold.
What are risk factors?
Risk factors are characteristics of the policyholder that precisely define how much risk he or she is exposed to.
