Hi, does anybody perhaps know exactly how group pricing works? Is it the case that there is usually not enough information to calculate the value of new business prospectively in a manner similar to calculating value of new business? I'm thinking that for group reserving, one can use the IBNR/UPR method. However, for pricing I am not quite sure. If anybody can provide some insight it would be much appreciated! Thanks!
Yes, I'd agree that we'd have a lot less information for pricing group risks. It's likely that there's quite a lot of cross-subsidy in the rates we charge within the group. But we wouldn't worry about this too much as long as the group was priced correctly overall. We can also be a bit more relaxed regarding the accuracy of the pricing as it's only a one-year contract, so we can adjust prices each year to reflect experience. There may also be risk sharing with the employer too which mitigates the risk. It would be interesting to hear from anybody who works in group pricing. Best wishes Mark
You need to consider the differences between pricing for a group of "homogeneous/heterogeneous" risks and pricing for individual based products. Several aspects come into play when pricing a group. Maybe work with an example. Most of the group life schemes I have dealt with are for corporates giving their employees death in service benefit...you know one of those reasons to attract motivate and retain talent within the organisation. 1. You have to consider what industry this group is from as it defines the risk exposure you dealing with e.g if you are pricing for a group of miners, what are your biggest risks? Occupational or injury claims could your biggest risks,other health hazards eg exposure harmful dust etc need to be considered. So your pricing will be different if looking at a group in manufacturing sector or back office workers 2. What will be your free cover limit? What I mean by this is, what level of sum assured will the group scheme employees enjoy without providing medical evidence? This has to be set at a level where it does not drive your medical costs through the roof. You would be aiming to have the 10-15% top sums assured in the scheme going for medical tests. 3. What will be your medical testing limits? What is generally used around here( not in UK) is what we refer to as a UNIT RATE price...I.e the average price/rate you will charge for each scheme member. Yout will find cross subsidy in this unit rate coz lower risks will subsidize for higher risks. Are you familiar with unit rate pricing? Recall Group risks are like an ice berg -30% is what you can see but that blinds you from the 70% sitting beneath the water-that is were you biggest risks lie and most of the time this population will be below the FCL and would not have attended medical tests So some industry experience can be useful if you have no idea of the claims experience of this scheme Pricing individual products looks at individual risks of the policyholders buying the policies Has this helped?
The other fact to consider is if you have an agreement to have the scheme for a long time eg renewed annually guaranteed fo say 5 years then you can take advantage of growing experience. ?.but what if you do not have that luxury...the scheme moves the following year after you burnt your fingers on paying critical illness claims from the population that never qualified for medical
