two quick questions: Chapter 12: Page 10:In dealing with appropriate ways to charge the per policy expenses in pricing, one of methods is sum assured differential: in what way is SA differential related to per policy expense. not clear at all. Page 21: why is it mentioned investment return is important in ACI pricing. is it also not a pure risk prdt, with low premiums and low reserves. core reading i am refering to is:"investment return will grow in significance...or where gtees are given (eg on ACI cover). No clear.
Per-policy expenses don't vary by policy size. If premiums are set as a rate per £x of sum assured and the same rate is used for all sums assured, larger policies will pay more towards these expenses that smaller policies. If you charge a different premium rate depending on the size of the policy (ie a lower rate for higher sums assured), larger policies would just pay their share of the expenses. The Core Reading isn't saying that the investment return is very significant in this situation, just that it will be more significant where guarantees are given. The guarantee on an ACI insurance policy is the fixed benefit payable on the earlier of CI diagnosis or death. Sarah
Per-policy expenses Hi I am a little confused with per-policy expenses. My understanding is that it is a fixed expense per-policy. If we have an assumption of what the total per-policy expenses are likely to be in the future, why do we not simply divide this by the number of policies we expect to have on our books, then add this value to each premium? Any help is appreciated. Thanks. Alastair
Remember, this is business and not an academic exercise. Premiums need to be competitive and companies will 'adjust' the premium charged to customers with this in mind. In theory the approach you suggest is the natural thing to do. A company may deviate from this however (e.g) at the low premium end if the resulting premium looked uncompetitive. In such a scenario, you may find a decision is taken to set a competitive (ie lower) premium at the lower end and cross subsidise by charging a proportionately higher premium at the higher end. This would naturally depress margins at the low premium end but this would be offset to some extent with increased sales volumes. If it didn't do this those at the low premium end would go elsewhere and they'd make no profit from this market group. Those at the higher end will be less price sensitive to those at the lower end.
Ok, so the per-policy expenses are not spread uniformly each policy? That makes sense from a business perspective. However, as I understood the ActEd notes, they said that the expense is spread evenly across all policies, ie there is no cross-subsidisation. Thanks for your help
It's not that the per-policy expenses definitely are or definitely are not spread uniformly across each policy. Each is possible, and competitive pressures will dictate the actual expense allocation policy when setting prices. In general, you will find in most companies that large policies subsidise smaller policies.
