Pricing Model Flashcards
Objectives
• Determined objectives as this will affect prices charged
o Higher price if key objective is profitability rather than gaining market share
Understanding product features
• Claims fixed or real?
o If real, do they depend on price, earnings, medical or court inflation?
• Understand t&c’s of product
o Excesses/ exclusions
o Consider how soon will claim be paid and if there is likely to be lengthy claims control process
• Consider whether expected sales volumes are realistic given level of comp
• Consider whether any options will be offered
• Understand target market
Gather data
• Needed to estimate claim freq/sev
• If new product, no data directily relating to product will exist
o Need to use other sources (TRAINER)
• Check data is correct and relevant, adjusting if necessary
o Eg if more stringent UW standards apply then a lower price may be appropriate
• Be aware of any limitation in data used (out of date/ obsolete)
Analyse data
- Split into major risk groups (eg gender/location)
- Too few groups = data not suff. Homogeneous
- Too many groups = number of data points in each will be too small to give credible results
- Analyse data over suitable period
- To estimate claim freq, number of incidents and exposed to risk need to be calculated
- Judgement must be applied to results if quantity/quality of data is poor
Assumptions for pricing
• Needed in order to build cashflow model
• Cost of benefits (claim freq/sev)
o Sev may depend on relevant inflation measure
• Margins
o Allow for expenses (potentially list)
o Suitable profit and contingency margins should be included
• Discount rate – depends on level of risk involved in product and company’s risk appetite
• Other factors
o Competitor reaction
o Reserving requirements/ cost of capital
o Taxation
o Reinsurance premiums
Monitoring
Once the product has been launched it will be important to monitor experience (sales volume, claim rates, claim amounts) and adjust premiums accordingly.
