1. 2. Marketability
1.1. Consider premiums, charges for marketability. Reconsideration of: *Design of product - remove feature that increases riskiness of net cashflow or include differentiation item *Distn channel - may permit revision of assumptions, higher premium, without loss of marketability. *Profit requirement *Whether to proceed with marketing the product
2. 3. Competitveness
2.1. Premium tariff tested against market
2.1.1. Close watch on pricing approaches of competitors with similar products, any significant discrepancies should be investigated. Cheaper price of competitor reduce market share of insurer. If competitor uses detailed price differentiation and risk selection, lives more likely to go for a lower premium. Average pricing then called into question. Two factors - price charged by competitors - conservatism of pricing basis. - number and accuracy of rating factors. The above will mean that assumptions are called into question - if not inline with practices as the rest. Competitor pricing impact on insurer depends on: *Market structure *Sales channel *Features of the product *Availability of comparison quotes *other features of the market
2.2. Need for volume
2.2.1. Fixed expenses are charged to the policies in some measure according to volume. volume is lower than market norm, then proportionate expense charge may be relatively large, and could impact competitiveness of premiums.
2.3. Margins
2.3.1. Maybe waived for some products in quest for competitiveness and market share. Loss leader increased margins for other products to subsidies low margin products elsewhere. Portfolio profitability. Over time and with emerging experience, it is expected that each product is brought back in line to produce own profits - becomes immune to mix.
2.4. Overall return on capital
2.4.1. required return on capital at each profit center met after all adjustments. if not, should consider withdrawing from that particular class of product. Profit center is collection of business items that have separate target for contribution to company profit.
3. 4. Reserving and solvency capital requirements
3.1. Writing policy, creates capital requirement. Can be expressed as %prem, SAR, basic pol reserves, or risk based calc. Therefore should charge for cost of this capital. charge is investment cost for holding assets locked into stat capital rather than in business business aquisition. IRR for policy is 10%, and captial invested in 4% yielders. The charge for the policy is a negative 6% per annum- this is a fricitional cost. Might not charge in premium for competitiveness if adequatetly captialised Can reduce SCR requirements by reinsurance Reinsurers lower SCR that direct writers - lower SCR overall- feedback some savings to consumer.
4. 5. Reinsurance impact on pricing
4.1. Overall cost of reinsurance
4.1.1. *technical assistance in data provision and pricing basis - good for new product *Risk sharing, limit overall exposure *Smoothing profitability *NB strain - financial *Tax arbitrage - reinsurer taxed on different basis *SCR arbitrage - reinsurer holds less capital per unit of risk *enabling larger risks to be accepted Insurer will usually make a loss from reinsurance unless arbitrage exists. EPV Prem > EPV recoverables : Profit
4.2. Benefit of reinsurance
4.2.1. where financial benefits of reinsurance exceed the expense increase or premium loss, i.e. tax arbitrage, want to price on net of reinsurance basis so premiums are competitive as possible.
4.3. Reinsurer approval
4.3.1. Reinsurer may have large say in production of premium tables - especially if take large proportion of the risk e..g. via quota share, or vary reinsurance commissions.
5. 6. Regulators impact on pricing
5.1. Pricing freedom
5.1.1. Basis may be prescribed given level that insurers have a role in welfare payment provision. will be closely monitored, the larger this is. May need to submit basis and calculation to supervisory authority before marketing. Other instances, aspects of pricing might be restricted e.g. risk cell differentiation restrictions.
5.2. Cost impact
5.2.1. Restrictions on the way an insurer can operate, e.g. info used for underwriting, Regulation may impose cost that needs to be reflected in premium assumptions: *requirement to invest in local assets - investment return assumption *Collect premium taxes, may need to load an expense. Should affect competitive positions as should impact market equally.
6. 7. Reviews
6.1. Regular monitoring of new business bases
6.1.1. New basis pricing, require up to date information When assumption no longer valid, the effect must be tested against existing premium tariff to see if charging rate needs changing. Basis changing incurred high expenses so may effect marketability. effects need to be weighed up against profitability and risks.
6.2. Regular monitoring of reviewable premiums
6.2.1. Periodic reviews based on contract terms. Revise rates if experience on portfolio has markedly different to that assumed from previous review - usually smaller margins on reviewable. need to be careful of selective lapsing when needing to change premiums - result of calculation will be invalid if significant healthy decline. Likely if lives can apply to a competitor and reinstate their cover more cheaply. Regulator gives guidance in some territories on what aspects of premium rates may be considered to justify a change in basis. e.gs. Adhere to setting out basis in policy literature, premiums only increased if valid reason - if change one or more assumptions for valid reason. premiums change as result of claims experience on portfolio and not individual policy
6.3. Premium adequacy tested for reserving purposes
6.3.1. If cross subsidy policy, i.e. sold for less than should have, reserves are required to extent of pricing basis is inadequate - as taking on risk. Size of reserve will depend on: speed at which the premium can be reviewed and upgraded to full rate likelihood that policy holders will renew the contracts as premium level is increased.
7. 1. Profit Criteria
7.1. Net present value
7.1.1. What is it
7.1.1.1. Discount profit signature at risk discount rate
7.1.2. How good is it as a profit criterion
7.1.2.1. Choice between two investment, should choose higher NPV. choice is optimal, can't be bettered - first priority is to maximise the net present worth of the company. Any measure going against NPV should go with NPV. Several assumption dependent: *Perfectly free and efficient capital market *When two risky investments are compared, each is discounted at a RDR appropriate to its riskiness Practical: *Law of diminishing returns, else, sell one policy unlimited times - costs more and more to find extra PH *It says nothing about competition. No point designing contract if can't sell.
7.1.3. How should NPV be expressed
7.1.3.1. Alone, tells you relatively little. could double premiums and double NPV. Need to standardise. Effort spent on selling a policy - initial commission. PH measured cost in terms of premiums, so could use premium income as this relates to size of the market. If can sell same level of premiums, for higher NPV, should do that - i.e. capture same market share.
7.2. Internal rate of return
7.2.1. What is it
7.2.1.1. Defined as the rate of return at which the discounted cash flow is zero. All things equal, should prefer higher IRR. May not agree with NPV. Both might not be higher than alternative
7.2.2. How good is it as a profit criterion
7.2.2.1. *If more than one sign change in profit signature, not unique *NPV related to indicators, can't with IRR *profit from outset, won't exist. *Not really telling you much more then what NPV is *Easy to understand however
7.3. Discounted payback period
7.3.1. what is it
7.3.1.1. Policy duration at which profits emerged so far have PV of zero. Time taken for company to recover initial investment with interest at RDR
7.3.2. how good is it as a profit criterion
7.3.2.1. Doesn't usually agree with NPV - ignores cash flow after DPP Shorter DPP doesn't mean greater NPV. If have limited capital, might prefer this
7.4. Which Criterion
7.4.1. NPV most common, not much info in DPP. Common approach - Use NPV in terms of initial sales cost, and make reference to DPP. For given NPV, chose one with shortest DPP. DPP more used in product design then in pricing.