Chapter 19 Pricing (1) Individual business Flashcards Preview

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Flashcards in Chapter 19 Pricing (1) Individual business Deck (24)
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1
Q

The stages involved in process of calculating risk premium

A
  • choose a base period over which to collect claims and exposure data
  • collect data, checking the accuracy and appropriateness of data
  • split data into homogenous groups
  • calculate historical burning cost premium for each group
  • analyse data eg identify trends - Analyse freq & sev separately
  • adjust and project forward to obtain future risk premiums.
2
Q

Factors considered when selecting base period

A
  • volume - long enough to have credible data
  • detail - where claims variable, a lot of data is needed.
  • trends - period should be long enough to identify trends.
  • relevance -
  • unknowns - ideally we want most recent data.
3
Q

Burning cost premium (BCP)

A
  • a common starting point in calc of risk premium is burning cost
  • BCP is the true past risk premium of an actual portfolio of data ie actual cost of claims incurred per policy or per unit of exposure
  • BCP = Claims / total exposed to risk

or BCP = Avg claim amt * Claim incidence rate

4
Q

Adjusting based values

A

-Unusually heavy/light experience in base period - either aggregate more years to make experience more
typical.

-Large or exceptional claims - decision needs to be made as to whether these claims are truncated or left in the data.

-Trends in claims experience - more weight should be given to most recent period if trends are identified.
Investigate if trends are likely to continue.

  • Changes in risk - these may appear as trends and can be dealt with as trends. Or insurer should project risk elements separately.
  • Changes in cover -if cover changes these should be allowed for in projections.
  • changes in the cost of RI
  • Seasonal variation in claims - claims varying over the year.
  • incomplete claims - late reported claims
  • change in agreements with suppliers - eg lower tariffs in new period ahead.
5
Q

Projection base values

A
  • We need to project past claims costs into the future allowing for :
  • changes in policyholders profile by benefit options
  • claims inflation
  • trends
  • other changes in cover
6
Q

Time periods involved in the projection

A
  • period of exposure containing the base experience
  • period during which policies will be written under new premium rates
  • full period of exposure covering all the claims that can arise from the policies written under the new rates.
7
Q

Allowance for inflation

A
  • the projections need to allow for the expected inflation between
  • the mean payment date of claims in base period
  • and the mean payment date of claim arising during the exposure period of new rating series.
8
Q

PMI : Taking risk class of policyholders in account

A

-Risk premium(age,gender) = Sum( i(k) * ACk)

where i(k) is incidence rate for benefit k
ACk is the average claim cost  for benefit/procedure k.
9
Q

PMI: The risk premium should be adjusted for which other loadings?

A
  • Investment income
  • contingency loadings
  • Other considerations: risk premium may be adjusted for excesses, the presence of a no claims discount
10
Q

Cash plans pricing

A
  • Similar to PMI except the cost of claim of some benefit classes is defined with a fixed amount per treatment, or per day of care.
  • For the latter will need to estimate expected number of days of treatment in order to calculate ACk.
  • These policies will often have a coinsurance or excess element.
  • Difficulties can arise in establishing age estimate on which to determine a flat rate. This is because rate of premiums are flat over broad age ranges but incidence rates may vary significantly by age.
  • Total calculate needs to be adjusted to take account of intertia. This arise because:
    1. people take cover thinking of one benefit not others covered by same policy.
    2. benefit might be so small policyholders do not claim. or forget to.
11
Q

Accidental death and total permanent disbility

A
  • Similar to PMI and cash plan, may have some experience rating.
  • premium = incidence rate * sum insured
12
Q

CI incidence rates

A

-We calculate different incidence rates for different critical illnesses.

  • i(x,d)
    this is the incidence rate at age x cause by illness d.
  • d may include:
  • hd - heart disease
  • s - stroke
  • c-cancers
  • o - other causes

i(x) = i(hd,x) + i(s,x) + i(c,x) + i(o,x)

-overlaps arise when more than one allwable CI cause underlies same individual claim.

13
Q

Accelerated CI incidence rates

A

-a relative approximatoin for risk premium rates for an acceleralted CI policy is derived below:

ix + [1-k(x)]*q(x)

  • where ix is the CI incidence rate
  • k(x) is the proportion of deaths due to CI
  • q(x) mortality rate
14
Q

Stand-alone CI insurance incidence rate

A
  • i(x)*( probability of surviving the survival period)
  • These formula are applied each CI definition separately and then combined to provide overall risk premium for CI cover.
15
Q

LTCI incidence rates

A

-Multiple-state or inception/annuity methods can be used to value the benefits.

16
Q

Modelling Complexities: PMI

A
  • Modelling is complicated by
  • the existence of NCD multi-states where applicable
  • the need to incorporate the reclaim of initial costs over several renewals in the pricing model
  • the need to model the chain of occurrence through GP referral via specialist to hospital, plus the delay to settlement.
17
Q

PMI complexities: It is necessary to estimate

A
  • it is necessary to estimate
  • distribution of claims frequency, difficulty in defining a discrete claim.
  • frequency parameters are dependent on duration on policy inception, age, gender, time of year, occupation.
  • distribution of claim amount, indemnity often without ceiling.
    • distribution of claim amount is dependent on hospital capacity, inflation , medical science progress.

-impact of sales tax on future growth.

18
Q

Data limitations: PMI

A
  • There are likely to be the following data issues :
  • an absence of insurance statistics
  • problems with family covres where details of individuals on risk may not be known.
  • problems with group arrangements similarity, where details of individuals can only be estimated.
19
Q

Modelling complexities: CI

A

-It will be necessary to estimate theoretically up to forty different distributions, if each covered condition is modelled separately, plus allowance for future trends.

  • possible use of separate approaches for disease-based and treatment-based
  • guaranteed and reviewable alternatives
20
Q

CI influence modelling complexities: Other influences on claims distributiosn

A
  • advancements in medical science which will impact cures
  • earlier diagnosis
  • simpler and more readily available operations.
21
Q

CI: data limitations

A

-statistics provide help with historic incidence - however practically, only cancers and heart attacks are likely to provide enough data.

22
Q

LTCI complexities: it will be necessary to estimate?

A

-distribution of claims frequency - little experience on which to estimate future transition rates

  • distribution of claim amount, could place cap on weekly/monthly benefit, but otherwise little control.
    • distribution is dependent on economy, inflation, & capacity

-demand, this is very dependent on political commitment.

23
Q

Data limitations: LTCI

A

-an absence of insurance statistics.

24
Q

Other issues which may complicate modelling

A
  • the role of genetics
  • trends in anti-selection
  • the quality of underwriting