Indiv Chpt 5 Setting Premium Rates

Question 1

Describe fundamental pricing and list of fundamental methods for calculating claim cost

Answer 1

1. Using tables or claim costs developed through other sources
2. Useful when pricing a new benefit, or if experience is inappropriate or insufficient
3. Own experience preferable to other sources
4. Methods
   
   4. 1 Tabular (DOSC)
   5. 2 Buildup and Density Functions (DOSC)
   6. 3 Simulation
      
      4. 3.1 First develop “expected” value based on whole book’s experience
      5. 3.2 Then expected value modified for information about the individual
      6. 3.3 Finally, simulate random statistical fluctuation

Question 2

Fundamental pricing: tabular method and buildup and density functions

Answer 2

1. Tabular Method:
   
   1. 1 Used for long term, non-inflation sensitive products, like DI
   2. 2 Sum of probabilities of claim at each duration, multiplied by cost of that claim
      
      1. 2.1 NP = sum(Pr(Clmx) * ACx V^tlx
      2. 2.2 ACx= sum(Clm)ContinuancexV^x
   3. 3 Techniques to model benefits
      
      1. 3.1 Monte Carlo simulation
      2. 3.2 Markov Processes (Linear algebra to model claimants’ states over time)
      3. 3.3 actuarial communication functions
2. Buildup and Density Functions
   
   2. 1 For inflation-sensitive products
   3. 2 Buildups
      
      2. 2.1 Each category claim cost = claim frequency X average cost per service
      3. 2.2 (Frequency of service) X (copay amount) = (reduction in claim cost)
   4. 3 Density function
   5. 3.1 describe total claim of an individual in a year
   6. 3.2 to calculate impact of deductibles or out of pocket limits, which don’t depend on particular service provided
   7. 3.3 difficult to deal with copays

Question 3

5 Rerating Steps

Answer 3

1. Gather Experience
   
   1. 1 Incurred claims and EP rather than paid claims and premium received
2. Restate experience
   
   2. 1 express last experience on current rate level
   3. 2 DI and LTC: discount claims to incurred period and include change in policy reserves in numerator
3. project last results: see trend master list (in handouts for video 4 of 5)
4. Compare the projection against desired results
   
   4. 1 Needed rate change = projected LR/desired LR -1
5. Apply Regulatory and Management Adjustments
   
   5. 1 Minimum LR standards over the future and entire lifetime

Question 4

2 Methods for turning claim costs into Gross Premiums

Answer 4

1. Block Rating (short time horizon) approach
   
   1. 1 Annual claim costs are calculated
   2. 2 If claim cost based on average demographic profile, adjust for any changes
   3. 3 N = Net prem (claim cost)
   4. 4 E^N = expenses that are % of net
   5. 5 E^F = fixed expenses
   6. 6 E^G = Profit and expenses as % of gross prem
   7. 7 G = gross prem = (N*(1+E^N)+E^F)/(1-E^G)
2. Asset share approach
   
   2. 1 Calculation done for representative rating cells
   3. 2 Policy year basis or calendar year
   4. 3 Asset share’s elements (columns)
      
      2. 3.1 Exposure values such as policies sold
      3. 3.2 revenue values, premium, investment income
      4. 3.3 claim values - shown both on “paid” and “incurred” basis
      5. 3.4 level of capital - (RBC), rating agencies, etc
      6. 3.5 Expense and profit targets, PV future profits/PV of future premium