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Australian School of Business

Actuarial Theory & Practice A - Week 11

The inter relationship of policy conditions, pricing, underwriting,

reinsurance, profits & capital

Anthony Asher 2014

Agenda

Policy conditions Marketing and Pricing Reinsurance Profit and Capital

The lecture will consist almost entirely going over the questions listed. Everyone should have at least one chance to answer over a 2 week period

Activity Details Hours Preparation: Consider lecture questions 2 Attendance: 3 Reading: UAM 11,13 & 16 3
Activity
Details
Hours
Preparation:
Consider lecture questions
2
Attendance:
3
Reading:
UAM 11,13 & 16
3
Write answers to the other
mid-semester questions and
Exercises
share with people in your
group – commenting on
theirs
2
TOTAL
10

2

Policy conditions

What are the normal benefits, charges and exclusions for the following:

Life lump sum insurance?

Whole life annuities?

Disability income insurance?

Accident, trauma and TPD insurance?

Motor and home insurance?

Marine and fire insurance?

Workers’ compensation?

Travel insurance?

Public indemnity, Directors and Officers?

Lender’s mortgage insurance?

Private Health Insurance?

DC and DB Superannuation funds?

Term deposits

Current accounts

Fixed and variable rate mortgages

3

Marketing and Pricing

What is a marketing brand?

How would you value it?

Balancing marginal cost and marginal revenue is the theoretical approach to pricing

Why is it difficult in the short run?

Why is it ever more difficult in the long run?

What are the alternatives

Pricing not only covers the benefits but also marketing and sales costs:

What is the theoretical approach to optimising sales costs?

Are there differences in the short and long run? What is economic or monopoly rent?

Is it legal?

Is it ethical?

Why is it relevant to pricing? What is hysteresis?

Why is it relevant to pricing?

4

Underwriting

What are the important underwriting factors for the following:

Life lump sum insurance?

Whole life annuities?

Disability income insurance?

Accident, trauma and TPD insurance?

Motor and home insurance?

Marine and fire insurance?

Workers’ compensation?

Travel insurance?

Public indemnity, Directors and Officers?

Lender’s mortgage insurance?

Private Health Insurance?

DC and DB Superannuation funds?

Term deposits

Current accounts

Fixed and variable rate mortgages

Functions of Reinsurance
Functions of Reinsurance
Functions of Reinsurance Financing Stabilization Capacity Catastrophe Protection Services Source: Robert D. Graham, General Reinsurance Corporation

Financing

Stabilization

Capacity

Catastrophe Protection

Services

Source: Robert D. Graham, General Reinsurance Corporation

Overview of Property and Casualty Reinsurance

6

 Reinsurance is not coinsurance.
Reinsurance is not coinsurance.
  • Reinsurance is not banking it is not the lending of money but it can have the same effect.

  • Reinsurance is not a security.

What Reinsurance Does Not Do

 Reinsurance is not coinsurance.  Reinsurance is not banking – it is not the lending

It is not Alchemy.

 Reinsurance is not coinsurance.  Reinsurance is not banking – it is not the lending

Reinsurance does not:

Convert an uninsurable risk into an insurable risk. Make loss either more or less likely to happen. Make loss either greater or lesser in magnitude.

Convert bad business into good business.

Source: Robert D. Graham, General Reinsurance Corporation

Overview of Property and Casualty Reinsurance

7

What are profits?

Who takes the following perspectives of profit?

A number in the accounts A number from the analysis of surplus A reward for taking risks A reward for entrepreneurial activity

Why and how should profit be un-entangled from other items in the accounts?

Inflation adjustments

Risk free interest rates

Risk premiums Do you agree with the following:

“Capital” is exposed to risks and therefore entitled to the risk premium

If shareholders do not have control other stakeholders will expropriate them

The objective of company is to make profits for shareholders

Shareholders should have the unfettered right to fire directors and managers Other stakeholders need to be protected against arbitrary shareholder power

Can mutual organisations survive in the modern world?

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Effects on Profit & Capital

Pricing: Margins can replace capital

When is this not true?

Underwriting: heavy underwriting likely to reduce premium income, but also will

Is declining high risk business heavy underwriting? Underwriting reduces anti-selection and

reduce claims costs and volatility of

heterogeneity is this a reduction of risk or

claims (and hence capital)

uncertainty?

Policy conditions: can be used to

One example is offering accident benefits and no cover for disease on insurance policies. Why do

“balance” underwriting and hence

this? Could it be a lost opportunity?

control claims costs

What is claims underwriting?

Outsourcing of administration can control expense costs and reduce capital requirements

What is the economic principle here?

Riskier investment strategies can increase long run return but also increase capital requirements

What is the economic principle here? Why might it be less valid than in the instance above?

Reinsurance is an alternative to capital

 

and should reduce the volatility (and

What are the economic principles at stake here?

level) of profit and capital requirements.

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Discussion 1

Most smaller superannuation funds outsource part or all of their member & investment administration. What is their operational risk?

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Discussion 2

How would you decide how much reinsurance to hold?

Discussion 3

If you were a general insurer and just suffered a heavy underwriting loss as a result of an extreme event so that both profit and capital were down, would you then increase reserves as well and exacerbate the loss?

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