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Pricing and financing strategies (factors affecting the theoretical cost…
Pricing and financing strategies
definitions
cost
the cost of benefits is the amount that should theoretically be charged for them
price
the price of benefits is the amount that can actually be charged under a set of market conditions. It may be more or less than the cost.
factors affecting the theoretical cost (risk premium) and the modelled cost
tax
commission
the cost of capital supporting the product
margins for contingencies
the cost of any options and guarantees
the provisioning basis
experience rating
investment income
reinsurance
why the actual premium charged may differ from the modelled cost
provider's distribution system for the product may enable it to sell above the market price, or take advantage of economies of scale and reduce the premiums charged
a cheaper price might also be as a result of the provider taking a lower contribution to expense overheads and profit
underwriting cycle
loss leader- a cheap product may attract customers to other, more profitable products of the company.
why the actual contribution rate may differ from the calculated contribution rate
cont rate increased because scheme is in deficit
cont rate reduced to eliminate the surplus
sponsor may want to alter the pace of funding by paying a higher or lower contribution in any year. Legislation may restrict this.
six financing methods for benefit schemes
pay as you go
benefits met out of current revenue, there is no funding
smoothed pay as you go
to smooth effects of timing differences between conts and benefits, short-term business cycles and long-term population change
terminal funding
lump sum set aside when first tranche of benefits becomes payable
just-in-time funding
funds set aside only in response to an external event such as sale of employer
regular contributions
gradual build up of fund between promise and first benefit payment
lump sum in advance
lump sum set aside when benefit is promised