IF3 - Chapter 10: Establishing the Price: Pricing Factors

What is a risk premium?

The amount required to cover the expected cost of claims arising from a risk.

What factors are added to the risk premium when setting the final premium?

Expenses, return on capital, tax and intermediary remuneration, with investment income also considered.

What expenses does an insurer need to allow for when pricing insurance?

Costs such as staff, administration, claims handling, IT, premises and marketing.

What is Return on Capital Employed (ROCE)?

A measure of the return generated from the capital invested in the insurance business.

Why is ROCE important when pricing insurance?

Insurers need to generate an adequate return for the capital they use and the risks they accept.

How does investment income affect insurance pricing?

Insurers can invest premium income before claims are paid, and the expected investment return can be taken into account when setting prices.

What is intermediary remuneration?

Money paid to an intermediary for arranging insurance, usually in the form of a commission or fee.

What are the two rates of Insurance Premium Tax (IPT)?

Standard rate: 12%
Higher rate: 20%