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LOMA 320- ISTAR > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

What is pricing?

A

the process of determining the amount to charge for a product.
charge a price high enough to generate the revenue needed to cover the products total costs and produce a profit, but not so high that customers buy competitors products.

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2
Q

What is insurance product pricing based off?

A

on assumptions about the ecnomy, interest rates, revenues, sales risk, usage and other factors.

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3
Q

What is the “price” of an insurance product?

A

the premium rate charged.

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4
Q

What must be considered when making pricing decisions for insurance products?

A
  1. costs
  2. customers
  3. demands
  4. competition
  5. regulatory requriements
  6. cost of benefits
  7. investment earnings
  8. modeling results related to expenses.
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5
Q

What is costs a major factor that influences the pricing of producsts?

A

it sets the lower limit for the products price because no company can sell its products below cots and survive

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6
Q

Operating costs results from what?

A

developing, prodcuing, marketing, distributing and servicing a product- into the premiums they charge for Li products.

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7
Q

Operating costs can be classified into direct or indirect costs. Define these.

A

Direct: any cost that is specifically rateable to or caused by a particular product
Indirect: cost that is not directly tracable to any single product. ie: CEO’s slary.

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8
Q

Operating costs are also classified as fixed or variable costs. Define these

A

fixed: remain constant regardless of the amount or volume of a product sold.
Variable costs: change in direct reponse to changes in the number or units products and sold.

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9
Q

What affects the interest rates an insurer earns on its invested capital and interest rates paid to consumers on some products?

A

Rise and fall in response to market interrest rates.

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10
Q

What can influence a customers ability and willingness to purchase products at various prices?

A
  1. purchasing power: the measure of the customers ability to buy goods and services ie: income, credit assets.
  2. price consciousness: measure of the importance a specific customer attaches to price and also awareness of particular prices
  3. brand awarness
  4. perceived risk.
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11
Q

Define the term “Demand”

A

an economic term for the number of units of a product that a company can sell under given conditions.
- affectd by economic conditions, product availability, substitute products, factors in marketing mix and value placed on a product.

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12
Q

Define the economic theory “law of demand”

A

states, as a general rule” the demand for a product is inversely releated to the product’s price.

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13
Q

What is “price elasticity of demand”

A

a measurement of how demand changes in relation to price changes and is calculated as

(percentage change in quantity demanded) / (percentage change in price)

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14
Q

What does a product have elastic demand?

A

if a change in the products price results in a greater than- proportional change in the quantity demanded for that product.

ie: large screen televisions

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15
Q

When does a product have ineslastic demand?

A

if a change int eh product’s price results in a less-than-proportional change in the quantity demanded for the product.

ie: water.

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16
Q

What factors affect the price elasticity of demand for a product?

A
  1. number of substitutes products available.
  2. need associated with the product
  3. the level of expenditures required to purchase the prodcut.
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17
Q

Do insurance companies have less or more flexibility in changing establish prices compared to other industries?

A

less, since they are long-term products and in most cases the prices are set once the contract begins.

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18
Q

Name some insurance regulatory influences that affect premium rates.

A
  1. insurers must include a certain benefit or guarentee that will affecg the premium rate that insurers charge for the prodcut because the premium must be high enough to cover the cost fo the benefit
  2. state departments require insurers to file premium rates and certify a max rate they will charge for any insured for all products offers.
  3. state nonforfeiture laws require insurers to include minimum vales in all cash value life insurance policies, relative ot the face amount and duration and impose minimum income benefits on deferred annuities, relative to premium mounts.
  4. some state insurance laws require insueres to use gender neurtal pricing.
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19
Q

The first step in pricing a product is to set up the pricing objective. What is this?

A

it describes what a company wants to achieve when pricing a prodcut.

  • can be short or long term
  • can vary product to product.
  • stated in writing and specific the time period for pricing goals.
  • this is periodically reviewed to make sure its meating it;’s objectives.
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20
Q

Pricing objectives can be grouped into 3 primary categories, Name them.

A
  1. profit-oriented,
  2. sales-oriented,
  3. competition-oriented objectives.
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21
Q

Define profit-oriented pricing objectives

A

they focus on the amount of profit that a company wants to generate.
- expressed in absolute or relative terms

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22
Q

How do businesses maximize profits?

A

increase sales and reduce costs.

  • difficult to predict
  • difficult for companies withy large number of prodcuts or product lines.
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23
Q

what is the most commonly used type of profit-oriented objective?

A

target return objective. which sets a specific level of profit as the goal.
- can be company wide or product specific

24
Q

Define a Sale-oriented pricing objective

A

focuses on a specific level of unit sales or dollar sales that the company wants a product to generate.

25
Q

What is involved in a “competition-oriented pricing objective”

A

involves maintaining or increasing a particular level of market share

26
Q

Define Market share

A

the ration of a company’s sales of a product within a specific market at a particular point in time ot the total industry sales for that type of product in the same market.

27
Q

How do you achieve a market share objective?

A

companies usually must base their own pricing decisions on competitor’s and potential competitor’s pricing.

28
Q

What do you call the action of which insueres set their prices at the general level their competitors establish?

A

status quo pricing- this allows companies to compete on a nonprice basis.

29
Q

What is nonprice competition?

A

exists when a company attempts to gain customer by using marketing mix factors other than price, such as quality of customer service.

30
Q

What is pricing strategy?

A

this helps define the way a company uses price as a variable in the marketing mix.

31
Q

There are 3 common approaches to pricing financial products and services. What are they?

A
  1. cost-driven strategies
  2. customer-driven strategies
  3. competition-driven strategies.
32
Q

Define Cost-driven pricing strategy

A

this is where a company sets its prices to cover the cost incurred in creating, selling and servicing a product and to allow for a predetermined level of profit.

  • simplest
  • effective in markets in which the company using the strategy is the market leader or had sig brand/company loyalty.
33
Q

Define Customer-driven pricing strategy

A

this is where the comapny sets prices according to what customers are willing to pay for the value they receive .
- objective is to quantify in monetary terms each source of value in a prodcut and to ensure that the price reflects the value
-

34
Q

Define the term “relationship pricing”

A

the practice of offering price reductions to customers who purchase multiple products from a company’s product mix.

35
Q

Define the term psychological pricing

A

this is a customer-driven pricing strategy based on the belief that customers find certain types of prices or process ranges more appealing to than others.
- most effective with customers who are price conscious/influenced.

36
Q

Define promotional pricing

A

a customer-driven pricing strategy in which a company sets lower-than-normal prices on certain products in attempt to stimulate sales of all the company’s products.

37
Q

What is the most frequently used type of promotional pricing?

A

Price leader
a product priced with an intentionally low profit level to attract customers who will purchase additional products at regular prices.

38
Q

What is a loss leader pricing promotion?

A

is a price leader priced below cost. loss leaders are rarely used, because the practice is actuarially unsound.

39
Q

Define competition-driven pricing strategy

A

a company sets its prices relative to those charged by its competitors
- takes one of two forms penetration pricing or flexible pricing

40
Q

Define penetration pricing

A

this is where the compan y charges a comparatively low price designed to build market share and to produce large sales volumes quickly.

41
Q

Define flexible pricing

A

where the price a company charges for a product varies according to specific sales conditions.

42
Q

Flexible pricing for grooup -insurance products often involves competitive budding situations or negotiated contracts. define these

A

Competitive bidding is a process in which buyers ask potential suppliers to offer price quotations on a proposed contract.
Negotiated contract is where the terms and prices of the contract are established

43
Q

In addition to basic pricing strategies, insurance companies have developed some specific rate structures that can be used under certain conditions. They typically take one of two forms 1. preferred premium rates, 2. quantity discounts. define these

A
  1. preferred premiums: reduced premiums offered to individuals who have lower mortality rates.
  2. Quantitative discounts: premium rates graded by the size of the policy.
44
Q

Insurers often use banding to establish quantitative discounts. What happends with banding in terms of rate structures.

A

a company creates a number of contiguous bands based on the face amount of the policy and charges different premium rates for each band.

45
Q

What is the Policy fee system?

A

a charge of a flat amount per policy per year to cover admin expenses in addition to a specific rate per 1K of coverage.

  • can be used in conjunction with banded rates
  • policy fee is intended to cover the fixed expenses involved in administrating any policy regardless of the premium amount.
46
Q

Describe Gender-based pricing

A

involves charging different premium rates to maloes and females because of the difference between male and female mortality rates.

47
Q

What is Market-by-market pricing?

A

this occurs when a company charges different premium rates depending on the jurisdiction, geographical area, or target market in which the product is sold.

48
Q

How/why do individual life insurance products different in rates for policies issues in different states?

A

they usual reflect the differences in premium tax rates, legislated prodcut features that increase costs or higher reserve requirements.

49
Q

Comapnies often use target return objectives to evaluate preformance. What does a company assess in order to evaluate its pricing decisions?

A
  1. price impact on the company’s financial performances
  2. prices impact on the performances of distributors
  3. reactions of competitiors and customers
  4. how closely a products actual experience matches the pricing assymptions made in setting the premium,
50
Q

Define the investment marging

A

the difference between the benefit costs that the insurer assumes in its pricing and the procduct’s actual benefit costs

51
Q

Define the impact of the underwriting marging

A

the difference between the benefit costs that the insuere assumes and its pricing and the products actual benefit costs

52
Q

Define the expense margin

A

the difference between operating expenses assumes when the product was initially priced and the expenses actually experinced by the company

53
Q

When looking at price reiew, what factors of each prodcut do insurer’s monitor ?

A
  1. investment margin
  2. underwriting margin
  3. expense margin
  4. difference between assumed lapse experienes and actual lapse experiences
  5. the difference between the amount of taxes assumed in pricing and the actual taxes incurred.
54
Q

To conduct product line pricing efficiently what should a company do?

A

keep track of where each prodcut is in its product life cycle, when new products are scheduled to enter the prodcut line, and how well products in the product line complement eachother.

55
Q

How do companies establish or change prices for a portfolio?

A

they use mathematical models or simulations to forecast results based on a number of hypothetical situations.

56
Q

What is the main use of pricing models?

A

to dertmine the adequacy of the overall pricing structure for the products included in a comapany’s product portfolio.

LOMA 320- ISTAR (10 decks)

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