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CII > IF3.10 Pricing Factors > Flashcards

IF3.10 Pricing Factors Flashcards

1
Q

risk premium

A

the expected ultimate cost in claims of the risk being accepted, including an allowance for the degree of uncertainty attaching to the claims cost.

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2
Q

pricing factors: Frequency

A

the expected number of claims should be forecast accurately and should account for anticipated changes in the environment, the portfolio of risks and the individual risks.

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3
Q

pricing factors: severity

A

The average cost of different types of claims with an allowance for catastrophies.

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4
Q

pricing factors: large claims

A

A rough prediction of how may large claims should be expected and how much they need to allow for these claims.

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5
Q

Periodic Payment Orders (PPOs)

A

can ad significant costs to claims settlements as they provide a service which makes structured payments to claimants for life (and avoid the need for the state to fund care costs once settlements have been spent by the claimants)

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6
Q

pricing factors: reinsurance costs

A

In order to protect the company from catastrophic single or combined losses insures buy reinsurance protection, which is a cost which must be factored into the premium cost.

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7
Q

Underwriting year, claims go in the year…

A

the policy incepts not the year they were made

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8
Q

Calendar year, claims go in the year…

A

the claim is made.

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9
Q

pricing factors: Claims Run Off

A

Claims data should be adjusted to allow for the provisional nature of case estimates & allow for cases to be reponed.
The company needs to ensure that appropriate reserves are in place, even if they want to deny a claim.

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10
Q

pricing factors: Incurred but not reported claims

A

precautionary reserves must ben in place in the even of a latent claims coming through

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11
Q

pricing factors: catastrophic claims

A

need to estimate frequency and severity and manage their exposures to buy optimum levels of reinsurance cover.

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12
Q

What is a catastrophic claim

A

an accumulation of a large number of claims all arising from a common even

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13
Q

pricing factors: Latent claims

A

In some instances there is a long time between the cause and the claim, e.g., with asbestos. These must be considered in the pricing process.

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14
Q

pricing factors: claims inflation

A

Claims inflation can often exceed generic inflation due to changes in legislation (some of which is retrospective). premiums must be adjusted to reflect any devaluation of the funds available to pay claims when they arise.

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15
Q

pricing factors: Exposure

A

Claims data is historical and should be adjusted to reflect todays exposure to keep predictions accurate and relevant.

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16
Q

pricing factors: Fraud

A

fraud costs insurers a lot of money and this must be taken into account when pricing premiums.

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17
Q

Claims fraud

A

fraudulently filing a claim e.g. if you caused the loss purposefully, or your incorrectly entering details of the loss.

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18
Q

Application Fraud

A

misrepresenting information in the application to obtain a lower price.

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19
Q

pricing factors: Legal aid, sentencing and punishment of offenders Act (LASPO) 2012

A

introduced changes to the way claims are notified and settled, therefore reducing claims costs in the short term.

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20
Q

In addition to claims costs what other costs must be reflected in the premium pricing

A

expenses

21
Q

examples of expenses

A
  • staff costs
  • premises
  • electricity and other utilities
  • computers and machinery
  • marketing and advertising
  • commission paid to agents and brokers.
22
Q

Fixed expenses

A

costs associated with processing a particular product, that does not increase as the size of the risk increases.
e.g. admin

23
Q

Variable expenses

A

Costs that vary according to the size, complexity and nature of each risk.
e.g. underwriting, commission & claims handling

24
Q

Commission

A

the amount paid to the agent, intermediary or broker who introduces the business to the insurer.

25
Q

Forms of commission

A
  • a percentage of the premium
  • work transfer (paid more to take on more work)
26
Q

Costs of claims handling

A
  • cost per claim
  • a cost reflecting the differences in the volume of work required for more involved cases.
27
Q

Other expenses to take into account when pricing?

A
  • risk management funds
  • low claims rebates ( pay back some premium to incentivise more positive risk management)
28
Q

Concept of Return on capital employed (ROCE)

A

Classes of insurance with a higher degree of volatility must be capable of generating higher profits if they are to justify the shareholders taking that risk.

29
Q

Risk capital requirement

A

the proportion of total account premiums which must be kept as free reserves to ensure that an insurer can meet its claims obligations

30
Q

Higher risk investments might carry…

A

greater return

31
Q

investment income

A

insurers are able to earn investment income due to the substantial amounts of capital and reserves they control and hence can invest.

32
Q

underwriting result

A

the business result without the investment income

33
Q

combined operating ratio (COR)

A

Compares claims & expenses to premiums

34
Q

What produces the cyclical nature of insurance?

A

the profit and the yield from the underwriting result plus investment income

35
Q

Hard markets

A

when rates and premiums are high

36
Q

soft markets

A

when rates and premiums are lower to attract more business on which to secure investment returns

37
Q

When will markets turn from soft to hard?

A

returns for insurers are inadequate and capital is withdrawn.

38
Q

What two types of investment do insurers take

A
  • interest bearing investments
  • investments whose value can be expected to grow at least inline with the economy equities (long term higher rate of return, but volatile short term)
39
Q

What happens if the contributions of capital gains were ignored?

A

returns would be understated, and the insurers products may be overpriced and uncompetitive.

40
Q

What happens if the returns/capital gains are relied on?

A

products may become very competitive, which may cause difficulties if the investment returns diminish.

41
Q

What taxes must insurers take account of in their pricing?

A
  • Financial Services compensation scheme (FSCS), surcharge based on a percentage of gross direct premium
  • Motors Insurers Bureau (MIB), annual levy dependent on claims experience & type of motor insurance.
  • Mesothelioma Act 2014, levy charged on all premiums for employers liability cover.
42
Q

Financial Services compensation scheme (FSCS)

A

fund claims by policyholders whose insurer has become insolvent

43
Q

Motors Insurers Bureau (MIB)

A

the insurer of last resort for property damage or injury caused by an uninsured driver.

43
Q

Mesothelioma Act 2014

A

fund from levies fund the diffuse mesothelioma payment scheme which allows those suffering from mesothelioma-related illnesses, but unable to trace their employers to obtain financial support.

44
Q

difference between IBNR and run off

A

IBNR hasn’t been reported yet whereas
run off claims have been reported and closes
Latent claims take a long time to become obvious

45
Q

why is claims inflation a problem

A

the value of money set aside to settle claims will have reduced in real terms.

46
Q

What is ROCE

A

return on capital employed i.e. the profit made on the capital invested

47
Q

Claims run off

A

when a claim is re-opened

48
Q

What do insurers have to account for when pricing their premiums

A
  • risk premium
  • expenses

CII (28 decks)

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