Bcp

[FatSam]

Hi, hope everyone's SA3 study is going well.

Please could someone confirm my understanding....or correct me if I am wrong on the following:

If BCP is based solely on one clients experience i.e full credibility, it's not really insurance. This is because the insured is effectively paying back what they have received in claims. All the insurer is doing is smoothing these claims over a given period and providing an administrative service.

So why would anyone ever use a BCP method with full credibility then?

If the above statement is true, is it applicable to September 2004, paper 2, question 1 part iv) ?

I know the above may perhaps be a bit stupid but hey.....

Thanks

 

[Ian Senator]

Your understanding is fine (and yes, that's what's happening in S2004).

But smoothing is a benefit, isn't it? Isn't most insurance just smoothing anyway? Because if experience worsens, then insurers eventually put up their rates anyway (and vice versa)! Insurance just lets you choose how far you want to smooth your experience - across all p/h (eg private motor with no NCD) or across years (eg motor fleet with full credibility on own experience).

Of course, the thing with most insurance is that you have the opportunity to swap insurers - so could take advantage of price differentials that way.

 

[FatSam]

Thanks Ian