1. 4. Expense Inflation
1.1. Data and adjustments
1.1.1. recent experience analysed past experience might be 80% earnings, 20% price, weight future in proportions. considerations: *current inf rates - price and earnings *Expected future inflation *Diff of govt FI and IL securities *Recent actual experience of industry -estimating expenses during a future new policy to termination -inflation of expenses between now and to which future new policies are issues
1.2. Level premium, incorporate element of expense inflation, even if reviewable also if premiums are increasing at a fixed rate or index - inflation assumption should be consistent with choice. Reviewable contract guars cover for more than one year, but subject to review - if change in expectation on future portfolio to which policy belongs. also between review dates exposed. Difference between being reviewed and renewed - renewable - only cover for one year, after which premiums change - implicit allowance in per policy expense assumption inf related to prices and salary mostly salary as insurance company staff main costs - different inflation even in same country - regions, supply and demand of type of labour.
2. 5. Commission and clawback
2.1. Commission
2.1.1. Assumptions determined by the amount the insurer is willing to pay to the distribution system
2.2. Clawback
2.2.1. Sales person paid higher commission in year one then subsequent years, probability might lose out on lapse. Case when PH pays RP, and high initial commission. Commission not deemed to be earned for a no of months even though paid, sales person likely to have to repay. Insurer takes credit risk- intermediary default on clawback, higher risk, lower likelihood of clawback in pricing basis. Need lapse estimations and proportions of unearned commission that will be reclaimed
2.3. Data and grouping of data
2.3.1. Commission
2.3.1.1. Influenced by levels of sales renumeration in market or legislative constraints
2.3.2. Clawback
2.3.2.1. Past experience by distribution type good guide. no early lapses against exposed split into product types - credibility issue of data may compare inhouse to market or consultants or reinsurers - monitor and amaned.
2.4. Adjustments
2.4.1. Include special arrangements between sales and company if single tariff of insurance premiums to different distns, with different commission structres, forecast volumes of business sold under each arrangement monitor volumes and assumptions vs actual and make adjustments
2.5. Loading commission into premiums
2.5.1. Enables rates to be loaded into premium formula on average, so overall commission loadings support commission paid. %prem, %Ben, fixed sum.
2.6. Comparison with life insurance
2.6.1. Higher comm then life, extra effort of sales person, explaining benefits, extra info collection
3. 6. Investment returns
3.1. Significance of assumption
3.1.1. *Understand how important the results of modelling exercise will be - little sensitivity, doesn't matter - also applies to margin size *Longer term prod, more important or where guarantee offered - accelerated critical illness cover. Sensitivity of investment assumption - size of reserves - (greater cashflow from investment income), duration of policy (longer earn), investment guarantees (caution of asset selection) given. also margins included. Importance by prod RP CNP CI -not important, small reserves, insensitive RP CNP Prefunded LTCI Important - large reserves SP CNP prefunded LTCI Critical, much larger reserves - less margins as can match RP UL IP Impacts: Unit growth, charges - wont be large, so impact likely to be small (if stand alone policiy) Claim ann value fn of future invret - establish reserve at sickness to start each year so can calculate cost of claims over year - discount of future claim amounts - important as possibly many years rate of return on non unit assets - depends on size, depends on charging structure PMI one year, not important
3.2. Intended investment mix for contract
3.2.1. *Likely mix of assets in future *investigate yields now and past *attempt to predict returns baring economic environment in mind *bonds usually back health care prods, where benefit is fixed. LTCI might have equity as cost increases Level of free assets should be considered. extent of matching to control investment risk. Market consistent approach, risk free rate. if stochastic, maybe able to adopt volatility and correlation of underlying asset types.
3.3. Extent of reinvestment risk
3.3.1. Positive cashflow in future, need to buy more assets, the more this is, the more the assumption should reflect expected future investment returns. Mismatching assets also makes this more key.
3.4. Consistent with basis elsewhere assumption affected by: *significance on profitiability - level of reserve build up *Intended investment mix - reinvestment risk, current return, likely future return of mix *Reinvestment risk and how much this can be reduced based on choice of assets - can take less interest of future investment yields if low
4. 7. Taxes
4.1. Data and adjustments
4.1.1. use current rates - only certainty
4.2. Types of tax
4.2.1. Tax on profit
4.2.1.1. Profit arising from contracts written. No basis alteration, but return afforded by premiums over claims and expenses may need adjusting. EPV of future profits x (1-Tax) meets profit target. Strong resns, reduces profit level - deferrence and hence, reduction in value - authorities would need to set tax rate higher to recoup -therefore preference to not over strengthen basis.
4.2.2. Tax on investment income less expenses
4.2.2.1. Excess of investment income over expenses Investment income and expenses net of tax in basis - SH return thus amended (I-E) basis need to allow for in model
4.2.3. Tax on premiums
4.2.3.1. State may tax premiums; Insurer remains neutral to levy, although may collect it. Makes total cost of insurance more expensive hence reduced consumer attraction. May look at designs that contracts don't become liable to premium taxation.. Don't need model allowance, although may load into premium so customer quotation covers.
4.3. Ultimately impacts shareholder return, hence, should be considered in pricing basis
5. 1. Benefit Amount
5.1. Long term contracts (IP, CI, LTCI)
5.1.1. Ben amount usually fixed. but need assn of average size of ben. Prems usually expressed as rate per unit sum insured - for average ben size. Very large policies, alter assns, i.e expenses in establishing contract as evidence - ben being treated as a risk factor, and we deciding how much premium rates should reflect the impact of this factor. Experience vary significantly depending on benefit size - larger better exp - socio economic, stricter underwriting
5.2. Short term contracts (PMI)
5.2.1. Data and adjustments
5.2.1.1. Analyse recent experience or similar insurer Take average claim size, *adjust for pol condition differences, *differences in negotiated hospital contracts - i.e. standardised costs, methods of settling - deals are more predictable - control volatility *future trends in provider capacity (capacity of hospital to provide treatment, if reduces, more expensive) and charges. *Treatment price list maybe used for private hospitals
5.2.2. Promise is indemnity usually for expenses therefore forecast no of claims and amount to assess.
6. 2. Benefit inflation
6.1. Long term contracts (IP, CI, LTCI)
6.1.1. Non indemnity, size of ben chosen at outset - has rationale of income or medical needs when salary not available. product needs to periodically keep in line with purposes. Premiums and benefits increaing at same rate in terms of index alone not appropriate as risk increases with age. so need initial funding to cover later periods. cost of claims increases over time, so charge too much premium early - use of cashflow model will allow for this. No simple index available to describe medical costs. CPI alternative, doesnt allow for salary of medical personnel or modern techno. Can have fixed escalations as a solution or CPI (max function) - under/over insurance a consideration. Include assumptions explictily.
6.2. Short term contracts (PMI)
6.2.1. Reimburse PH Assumption on inflation of costs PMI benefit is function of: *Medical inflation *Change in medical treatment protocols -procedures adopted in medical treatment. new treatment, less specialised staff *Future charging structure of hospitals and consultants - use of operating theatre change to something like time spent in theatre vs lump sum in past. *Future age profile of portfolio
7. 3. Expenses
7.1. Types of expenses
7.1.1. *Direct - relate specifically to class of business and indirect - overheads *Direct and overhead subjective distinction. *Direct - fixed or variable - depend on level of business *assumption should reflect incidence of direct from functions - initial aquisition (%prem - comm), initial medical (%Ben), initial admin (flat average cost), renewal admin (flat + inflation), renewal commission (%prem), investment (rate of return), withdrawal (flat plus inflation), claims admin (fixed plus inflation per pol cost, of % Ben), termination. PMI highest renewal - send post, changing premium. LTCI just inflate. unimportant expenses for PMI- investment, withdrawal, termination contribution to overheads (fair share, flat amount plus inflation relative to vol of business on books)
7.2. Data
7.2.1. Analyse recent experience Base on similar line or industry if unavailable
7.3. Grouping the data
7.3.1. Result of analysis - division of expense by function, and if expense is proportional to level of premium or benefit Allocate fixed and overheads by sensible method - computer costs, property, staff, amortisation etc. PMI renewal usually equal to new. Done by initial and renewal assumptions. No new pols renewing, excess of initial over renewal spread gives total per pol admin expense. Commission similar Claims admin - % increase to average claim cost assumed
7.4. Loading expenses into premiums
7.4.1. Expenses that vary with policy size
7.4.1.1. easily loaded
7.4.2. Per policy expenses
7.4.2.1. Don't vary by policy size. calculate premium for average policy benefit size (per unit benefit) *if average is borne out in practice, should recieve per policy expense loading assumed in pricing basis. *Large policies are subsidising small ones - could become uncompetitive *not problem for PMI as premiums not expressed as % of benefit, so no large and small subsidies - each policy will pay per pol expense assumed. *Incorporation of non varying expenses into charging structure: -individual calculation of premium rates - use actual ben level, loading explicitly, could do for very large cases, small become uncompetitive -pol fee addition to premium, or deduction to ben - same prob for small policies. Idea is that prem covers variable, and this is seperate cost. May need to reduce from theoretical value to make small competitive, but need to compensate elsewhere. - increases risk to company of selling too many small policies *Sum insured differential - charge different premium rates according to band into which benefit size falls, need estimation of no policies in each band. Second approach most common
7.4.3. Fixed expenses
7.4.3.1. allow for likely volumes of business to be sold. Total loadings over expected lifetime recoup direct expenses of the product and pay fair share to overheads
7.4.4. *Degree of cross subsidy, and need to ensure competitive set of premiums also a constraint. *highly competitive channels, insurers may set premiums only slightly over variable, therefore, insufficient fixed cover. some contribution better then non. *total contribution to fixed most important- for a prod: Total contribution = per pol contribution * no policies sold Overall: Total profit = sum all products to total contribution - Overheads Want to maximise total contribution
7.5. Comparison with life insurance
7.5.1. More work to put product on book then for life- underwriting, non medical limits often lower, time taken to assess longer, more information to assess. Prod develop - more cost, develop literature, train staff - initial expenses higher Effort to convince of need and explain product Claims expenses more onerous - time, medical info, to validate claim time and expense to maintain - validity of ongoing claim - Admining payments, rehab costs, assessing if higher ben levels required