Sample Dissertation Format - Scor

3 Introduction to Actuarial Pricing Techniques
This chapter gives an overview of the pricing techniques used to price health insurance
products. The details of these techniques will be set out in chapters 4, 5 and 6. They are
drawn from The Actuarial Education Company (2010).
Actuaries use a series of steps to derive an appropriate price for insurance policies. Firstly,
they use a suitable model to project the cost of the future claims under the policy; this cost is
called the risk premium. This risk premium is then increased to cover the company’s future
expenses, the cost of capital and reserves, and the required profit margin to give the gross or
office premium which is ultimately charged to the policyholder.
Pricing a product an ongoing process and like most actuarial work can be viewed in the
context of the Actuarial Control Cycle. The Actuarial Control Cycle is illustrated as follows:
Figure 1. The Actuarial Control Cycle
Source: Bellis, Lyon, Klugman and Shepherd (2010).
The cycle is carried out in an environment with external forces which the actuary must
consider, as well as the requirements for the actuary to act with professionalism.
For pricing, the problem is calculating suitable premiums that satisfy the company’s
profitability requirements. The solution is to develop a robust pricing model to calculate
these premiums. Monitoring the results will include evaluating the company’s experience and
comparing this with the assumptions used in the pricing model.
The process of deriving the premiums has been divided into the following steps for the
purpose of this research:
1. Data collection and analysis
2. Setting assumptions
Monitor
Result
Define
Problem
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Develop
Solution