Chapter 24

Question 1

what should the formulae: value of premiums = value of benefits+value of expenses+contributions to profits be adjusted to take into account? (9)

Answer 1

• Tax
• Commission
• Cost of capital (the cost of needing to hold solvency capital)
• Contingency margins
• Options and guarantees
• Provisioning bases (this basis could differ from the basis used to calculate the cost)
• Experience rating
• Investment income (is allowed for within the discount rate)
• Reinsurance cost

Question 2

What are the factors influencing the price of benefits? (4)

Answer 2

• The distribution channels used
• The level of competition in the market
• The approach taken to expense and profit loading
• The provider may have a captive market that is not price sensitive

Question 3

Once the price of benefits is determined, what should happen?

Answer 3

it should be profit tested and market tested

Question 4

What is cost and price of benefits?

Answer 4

• The cost of benefits is the amount that should theoretically be charged for them
• The price of benefits is the amount that can be charged under a particular set of market conditions and may be more or less than the cost.

Question 5

The main methods of financing benefits are: (6)

Answer 5

• Pay as you go (unfunded)
• Lump sum in advance (funded)
• Terminal funding (funded)
• Regular contributions (funded)
• Just in time funding (funded)
• Smoothed pay as you go (funded)

Question 6

• Risk pooling possible when: (6)

Answer 6

• Risks are independent
• The probability of an event is relatively small
• Large numbers pooled
• Ultimate limitation of liability (there is a cap on the amount that is claimed)
• Moral hazard eliminated
• Sufficient data to model and quantify the risk