Pricing Considerations Flashcards
0
Q
what else does pricing involve?
A
- creation of new rates for new products and covers
- adjustment of existing rates for changes in claim experience
- changes in relation to competition creation
- amendment of target loss ratios based on budget requirements
1
Q
What does pricing involve?
A
- Based on past 3 yrs claim exp evaluation of individual claim exp, EG Fleet Insurance.
- System generated pricing can be based on múltiple factors
- (vehichle model age postcode detailed rates based on exposure factors)
- property si the application of the rating formula)
2
Q
other pricing considerations
A
- internal data to be sufficient
- external data to be examined critically
- price elasticity of demand, for ur own products and ur competitors, eg if u raise prices how high can they be raised before customers seek elsewhere. what level of price reduction would achieve a 10 % increase in volumes
3
Q
How can we select the base period in the projection of claims experience?
A
- Use of experience rating for the pricing of individ large risks
- typical data, no. of pols. no vehichle- years, property si, wageroll, no. of bedrooms
- claims and exposure data can be transformed into measures of frequency severity and cost of claims per unit of exp & burning cost DATA
4
Q
Establishing a base rate based on claims experience
A
- in considering particular accident years as potential base periods Question whether the account has a similar mix of business did any particular features effect the experience?, severe storm
- enough claims to make the experience credible? liab account will need data from older periods, property d not so much
- main criteria - number of claims, extent to which claims costs are devloped/run off
5
Q
Making adjustments to base data - calculating future risk premium, what to consider
A
- high severity ‘ frequency of events
- external influences with any relevance to product
- Mix of business
- cover changes
- claims inflation
- reinsurance recoveries
6
Q
rating structures and prices using multi way analyses ‘ generalised linear modelling )glm·
A
- glm is a scientific basis for estimating premium rates and should lead to consistent internal prem rates.
- rates set with the use of glms should only need to vary with changing market conditions.
- the use of these models provides an equitable approach
7
Q
multi way analyses
A
- home and motor claims databases interrogated on basis of multiple rating factors, to identify infleucne of frequency and severity by type of claim eg influence of location on vehichle theft.
- sme commercial based on more limited rating factors, influenced by location related claims data, flood and subsedence, the rates regardless must reflect the degree of risk brought to the common pool
8
Q
other pricing components
in order to arrive at the final premium, costs must also include fixed and variable expenses, such as
A
- sales, uw and admin costs
- claims handling costs
- reinsurance
- levies and taxes
- intermediary remuneration
9
Q
capital asset pricing model (CAPM)
A
- investment income should not normally be a direct component of pricing capm’
- general finance model compares uw margin achievable on diff accounts or classes of business
- weighted by the degree of risk associated with each account or class.
- useful in assessing the accuaracy or risk, focuses not just on the individ risk but the context of the portfolio to which it might be added
10
Q
the largest single pricing component is
A
- claims costs
- plus the balance between fixed and variable expenses are of considerble importance
11
Q
experience rating and the burning cost method
A
- experience rating is used to price v large individ risks or schemes portfolios or risks with large )and thus credible= claims experience,
- for v large risks we use the burning cose method , it is a calulation that translates the incurred losses into a rate against a measure of exposure appropriate to the risk.
- to make make a valid calculation, the no of claims generated by an individ risk or account needs to be statistically significant ie results reliable and not by chance. calculation best suited to risks with a high frequency of claims but narrow size distribution
12
Q
burning cost method and drawbacks
A
- el and mtor fleet risks suitable for this calculation.
- calulating the burning cost = divide incurrred claims by the wage roll and express as a %.
- drawbacks’ figures used may not reflect the ultimate value of claims. full allowance not made for inflation.-
- risk may be unfairly penalised if sustained a large loss. no allowance for trends in claim data. all data is historic’ future claims may not provide a similar picture
13
Q
severity or frequency in experience rating
A
- experience rating can only deliver planned profitability if the true cost of large claims is understood and their treatment is consistent.
- with an account of experience related cases, only risks that can bear the cost of a large claim in a 3 ‘5 yr experience should be eligible for experience rating.
- accepting THAT the cost of large claims must b spread across the account, excess big claims can be removed from the exp calculation for individ risks and spread across the account loaded by a standard amount to account for’ compensate for the top slicing
14
Q
experience rating pricing factors for large risks
A
- the claims experience of indivi large risks must be adjusted to account for their ultimate likely cost including :
- ibnr and ibner
- past and future inflation
- relevant claims trends
- cover and exposure changes must be factored into the calculation.
- despite all this claims frequency is generally regarded as a far better predictor of future performance.
- the incidence of claims is key, once an incident has occured, its eventual severity is random and not indicative of the quality of the risk
