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Pricing v/s Reserving Basis

S

sahildh

Member
Can someone please explain me the difference between pricing and reserving basis in simple terms? I mean how are the two terms interrelated as well as differ from each other? An example along would be helpful.:)
Thank You
 
The pricing basis contains the assumptions you use when you decide what price to charge to your customers - what you think might happen (with investment return, mortality, withdrawals etc) before you write the policy.
The reserving basis is the set of assumptions you use when calculating a reserve for a policy - the amount you need to set aside to pay future claims, (net of future receipts).
They may or may not be the same depending on the level of optimism/realism/prudence you want in each activity. This will depend on things like regulation / competition / risk and uncertainty etc. Also your assumptions for reserving might have changed from when you priced (possibly many years ago).
 
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