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Group Pricing

G

Geraldine

Member
A bit unsure about something:

Z=credibility factor
L=profit loading
A=book premium for group
E=risk premium based on group’s experience
Group premium = ZA + (1-Z)E + L

1. What actually is the book premium? Is it a standard table? Where does it come from? What is it based on? A definition would be great.

2. Is it the A or the E that reflects the specific profile of the scheme in terms of gender, age, occupation and industry etc.

3. I don’t understand statements I’ve previously read - such as “unit rates specific to a scheme are adjusted for the scheme’s profile”. Firstly, are unit rates another name for the final combined rate (per unit)? So is this just a general statement saying that the final combined rate accounts for the specific profile through a credibility blend?

This is how I’m interpreting everything at the moment:

- the book premium / rate is some sort of standard table based on similar schemes to the one being priced.

- the book rate gets adjusted to reflect the scheme risk profile

- the scheme’s actual experience is also factored in. The more credible it is, the higher the value of the credibility factor (and therefore the smaller the importance attached to adjusted standard tables)

- the scheme’s actual experience is a burning cost adjusted for exposure in the next period, on-levelling and inflation.

Have I got something wrong here?
 
Last edited by a moderator:
Hi Geraldine

Do you have the ST1 or SP1 Course Notes? Group pricing is discussed in Chapter 18 of the current SP1 course (and also Chapter 18 in the previous ST1 notes). If you have a look at this I think it will answer most of these questions. There are also quite a few relevant terms defined in the Glossary.

As you suggest, book rates are the insurer's own expected rates, determined in a similar way to group pricing. These can be adjusted for the expected volume/mix of the scheme (so A is adjusted to answer your question).

The expected experience (burning cost or E) can also adjusted for future membership mix/volume.

As suggested in the SP1 notes, the larger the scheme, the less likely rates are to vary by member. Which brings us to unit rates.

Unit rates (or bulk rates) are defined in the Glossary. "This refers to a premium rate applied uniformly per head on large schemes across a membership type (independent of actual members’ ages or gender)." So the expected cost for the whole scheme divided by the number of members.

I hope this helps. There is a good past ST1 numerical pricing question that I think helps understand the past experience part of premium setting for group schemes. It is ST1 Sept 2009 Q5.

Sarah
 
Thank you Sarah! Your explanation and going through that ST1 question again really helped!
 
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