Pricing Awareness Flashcards
What are the chief four components of the premium?
- Claims payments
- Expenses
- Profit
- Levies
What must underwriters consider when allowing for the portion of the premiums intended to pay claims?
The uncertainty relating to the costs and the fact that some claims may take some time to settle so the final payment may be inflated
What is used to factor protracted claims settlements?
Ogden tables
What is the purpose of the Ogden tables?
To calculate loss of future earnings in personal injury or fatality claims. They account for life expectancy and loss of earnings until retirement and provide a range of award modifiers from -2% to 3% in increments of 0.5% set by the Lord Chancellor
What are attritional claims?
Claims that are frequent but low severity eg broken windscreen or lost phone
What are catastrophe claims?
Multiple claims all arising from a single event
How may insurers protect themselves from catastrophe claims?
Reinsurance
What is the difference between catastrophe claims and large claims?
Catastrophe claims are multiple claims arising from the same event, large claims are substantial isolates losses
What does IBNR mean?
Incurred But Not Reported
Claims that have occurred but not yet been reported to the insurer
What are the two types of expenses?
Fixed and variable
What are fixed expenses?
Do not vary with the business written
What are variable expenses?
Change according to the business written
Give some examples of fixed expenses
Salaried employees Insurance cists Policy issuance Loan payments Bills (eg utility, rent) Advertising
Give some examples of variable expenses
Stationery Raw materials Temporary/hourly employees Commission Shipping
What is needed in order to underwrite business?
Capital
What is profit? What would you expect this to be?
The return on capital which the shareholders expect for supplying it. Also known as return on equity (ROE) - expect it to be between 10-15%
How can insurers earn interest from collected premiums?
They can invest a portion of the common pool to generate returns on it, generally in low risk investments
What are the main 2 levies on insurance premiums in the UK?
MIB - on motor insurance depending on the insurers mix of business (higher rates for non-comprehensive)
FSCS - based on an insurers gross direct business
Who are the FSCS and what do they do?
Financial Services Compensation Scheme
Provide compensation to policyholders where their insurer has become insolvent.
What is a technical price?
The price for a risk determined by a rating tool and an underwriter’s subjective judgement. Considers market conditions, competitors, and the insurer’s plan and strategy
What is meant by subjective risk assessment?
Factors not accounted for in the rating tool which the underwriter knows and think should affect the price
What is exposure pricing?
Determining expected losses and pricing a risk based upon the insurer’s claims experiences based on similar risks in their book
