Chapter 33 CMP

Discussion in 'CA1' started by shinmo, Aug 28, 2015.

  1. shinmo

    shinmo Member

    Is pricing or provisioning basis more prudent?

    Thanks :)
     
  2. 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
     
  3. Oxymoron

    Oxymoron Ton up Member

    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.
     
  4. 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.
     
  5. Oxymoron

    Oxymoron Ton up Member

    Perfect! Thanks!
     

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