Chapter 33 CMP

[shinmo]

Is pricing or provisioning basis more prudent?

Thanks

 

[Venkatesh Konar]

The provisioning(also called reserving by actuaries) is more prudent than pricing basis. pricing is usually done on best estimate basis whereas provisioning is done with margins for worse experience. This is the statutory requirement as well

 

[Oxymoron]

Pricing need not always be on a best estimate basis, especially when there is a lot of uncertainty surrounding the data used for setting assumptions and/or complexity of the product entails a more stringent basis.

Pricing and reserving are also interconnected to an extent since tighter reserve basis => more reserves => lower profits and hence requirement to set higher price to compensate for it.

This higher price could lead to anti-selection, however. It will ultimately boil down to the elasticity of price charged on volume sold and ROE target.

 

[Venkatesh Konar]

True, pricing would be done with margins incorporated into the best estimate assumptions. However higher reserves don't imply lower profits. They only mean you're deferring your profits. If your experience turns out to be as expected in your pricing basis, higher reserves would still give same profits than say slightly less prudent reserving basis. Only thing that profits would be released later.
Although higher reserves will create more of a capital strain.

 

[Oxymoron]

However higher reserves don't imply lower profits. They only mean you're deferring your profits. .

Perfect! Thanks!