Pricing Flashcards
What part of the ACC is pricing?
Developing the solution
What makes up the price?
Theoretical cost + Expenses + other factors that should be allowed for + Profit loading
Expenses of a provider that should be allowed for in price?
RAPID COST Design of contract, Marketing, Sales Commisions - Initial, renewal Administration - set up, premium recording, paying benefits Contribution to overheads Management fees for assets
Other factors that should be allowed for in expenses loading
Tax
Cost of guarantees and options
Ability to adjust future premiums on experience
Reinsurance costs
Investment income
Contingency margins
Cost of capital supporting product (released as positive cashflows during term)
Differences in provisions versus cost basis
Solvency capital only used for reserve for policy
How would we do a profit test?
Once got theoretical cost+expenses+other expenses do either
1) Say we want £x profit on each policy, and work out the premium, see if acceptable to market
2) Work out a premium we want to charge (perhaps market leader) and find if profit acceptable to company
What’s the important point about the result of profit testing, whether it’s the profit or premium that’s found?
It must be acceptable to company or market
What models will be used for profit testing?
Stochastic simulation
Set of deterministic scenarios
In deciding what model to use in profit testing, what analysis will be done to make the decision on which model?
Cost/benefit analysis
Why might a premium charged for one company be different than another? How might the underwriting cycle change the premiums? What might the frequency of premiums do to the price charged?
Economies of scale - reduce premium charged
Good ditribution system - higher premium
Lower profit or contribution towards overheads - lower premium
Top of underwriting cycle - higher premiums
Bottom of underwriting cycle - lower premiums
Low price to attract people to more profitable policies
Single premium cheaper than regular
