Pricing, Expenses Flashcards
How can we test premium for robustness?
- profit testing models to see premium under different scenarios
- set of deterministic scenarios
- use stochastic modelling to scenario test if there is high risk
- market testing to ensure consumer actually buys product
What are the different financing strategies?
- Unfunded - PAYG not necessary to establish funds to provide for benefits in the future
- Funded - Smoother PAYG - allow for timing differences between contributions and premiums, short term business cycles and long term population change
- Funded - Terminal funding - set up funds as soon as first payment of series of payments falls due (annuity)
- Funded - Regular contributions Funds built up between when benefit promise was made and when first payment is due (pension)
- Funded - lump sum in advance Lump-sum set up as soon as benefit promise made (lump sum payment)
- Funded - Just in Time As soon as risk event arises relating to future financing of benefit, fund it set up (bankruptcy)
Factors to consider when determining discontinuance benefits
- expectations of the policyholders
- competitive considerations
- what was disclosed at sales stage
- ease of calculating terms
- cost of implementing terms
- frequence of changes that need to be made to terms
Why is the price of benefits and cost of benefit different?
- distribution system sells above MP
- economies of scale sell above MP
- marginal costing is used (overheads not included in price)
- loss leading: stimulate sales of other products
- competitive reasons
- limited number of providers so charge higher prices
What are start-up capital and development expenses needed?
- collecting premiums/ contributions
- investments set-up
- admin systems set-up to administer benefits
- comission expenses amount of capital kept depends on volumes
- may need to be adjusted to increasing/decreasing volumes
- if volumes become level then move excess capital to another tranche of business
Why do we need capital?
- financing strength
- impact on accounts
- guarantees
- solvency requirements
Why do companies need capital?
- financial consequences of adverse circumstances
- to cushion against fluctuating trade volumes
- build funds before expansion
- need capital for cashflow management for stock
- need start up capital
How do you adjust expense loadings for pricing purposes?
- cross-subsidies: renewal contracts cheaper to administer but same premium
- inflation: actual expense loading needs to include inflation
- competitiveness: price needs to be competitive so adjust expense
What is the reason for expense allocation?
- Profitability purposes
- Pricing purposes
- Provisions purposes
- Financial planning
- Inefficiency understanding
- Internal Management Accounts
- Source of surplus
- Cashflow management
What are the different types of expenses?
fixed e.g. rent of office building
variable e.g legal expenses relate to claim amount
mixed e.g. salaries of staff can vary in LT due to automation, changing in levels of business etc.
direct vs. indirect
What is economic capital?
Economic capital: capital appropriate to be held calculated using assets, liabilities and the provider’s business objectives
It is based on:
Risk profile of assets and liabilities
Correlation of the risks
Level of credit deterioration provider wants to withstand
How do you project the solvency of an insurer that is about to go insolvent?
- Protect solvency of insurer from range of different scenarios using a stochastic model
Issues that need to be addressed/modelled:
- Current value of surplus assets
- Outstanding financial obligations, minority interests and tax
- Amount and timing of any debt/obligations
- Profits available to shareholders (after tax)
- Issues relating to staff benefit schemes
- Issues relating to industrial relations (redundancies)
Any actions insurer might take into response to certain events must be included in the model
