Израчунавање премије осигурања живота

Израчунавање премије осигурања живота

dr. Darko Medved

Hotel „SLAVIJA“, Beograd, 9. i 10. decembar 2011. godine

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KALKULACIJA PREMIJE

Insurance premium structure Classical life insurance pricing Profit testing Parameterization ABC&TC

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Insurance premium structure

The insurance premium is a price for insurance service and defined by an insurance contract between the policyholder, the insured person and the insurance company.

The gross premium consists of the technical premium and the operating cost. The operating cost supplies the money for the exercise of the insurance business. The technical premium is the premium, intended for substituting claims, and is calculated according to the rules of actuarial mathematics.

Operating cost

Operating fund

Risk premium

Savings premium

Balancing risk

Mathematicalreserve

sum insured

sum at risk

Mathematicalreserve

Gro

ss p

rem

ium

Tech

nica

l pre

miu

m

1….from savings premium and interest2….covered from the risk premium

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Elements that affect the premium

The amount of insurance premium is foremost dependent on the nature of the insurance coverage, included in the insurance contract.

The insurance premium is the function of general parameters, which determine the group of insurances in an individual insurance class, and special parameters, which finally determine the premium on the basis of an individual insurance contract.

KZP = F(B, N, BO, M, O, I, E, s, x, f, em, pr, n,m)

B The form of insurance coverage

N Investment policy of the term business fund

BO Parameter, describing the way of calculating the bonus

M Mortality tables

O Surrenders

I Technical interest rate

E Costs, embedded into insurance premium

s Benefit

x Age of the insured person

f Gender of the insured person

em extra mortality

pr Level of profitability

n Insurance duration

m Mode of payment of the insurance premium

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Types of costs in the insurance industry

The analysis of costs in an insurance company

Assessment costs

Compensation costs

Operating costs

Insurance acquisition costs

Cost of claims Investment costs

Other operating costs

Interest costs

Amortization of investment funds

Investment management costs

Labor costs

Amortization

Other costs

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Types of costs in the insurance industry

Costs of claims present the category of costs, that are directly linked to the process of settling of the insurance claims.

Operating costs present in the strict sense the costs of the acquisition cost and other operating costs.

Acquisition costs cover the direct costs, linked to insurance admission: Commission for insurance agents Insurance underwriting costs Costs of issuing an insurance policy Advertising costs

Insurance acquisition costs present the majority of operating costs in insurance balance sheets, therefore insurance companies pay particular attention to these costs.

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Distribution of cost structures

The following aspects must be considered in the cost structure of the insurance premium: Technical aspect (actuarial aspect) Customer aspect Organizational aspect Time aspect

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Actuarial aspect Basic insurance coverage Additional benefits Accelerators Options (for example the option of increasing the insurance sum) Guarantees (guarantees of rates, capital)

Customer aspect The customer decision is made in terms of buying preferences

(insurance premium: service) The premium reflects the value of individual benefits in the eyes of

the customer Insurance as such have no concrete manifestations (selling an

invisible product)


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Organizational aspect (value chain) Aspect by business processes

Developing a new product Marketing and sale Underwriting CSC Claims process

Underwritingprocess

Customer support Claims process

Development Marketing and sale

Value chain


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Distribution of costs according to the time (time aspect): Initial costs are costs, that occur in the first insurance years after

issuing the insurance policy. Adminstration costs are costs, linked to the maintenance and

servicing of existing policies and insured persons. Closing costs are costs, linked to the settlement of insurance

claims.


endowment annuity

TimeTime

Cost

s

Cost

s

Cost structure - example

type variable fix

pensions 2,0% 10, 0

unit linked 4,0% 12,8

term 5,5% 12,5

accident 6,0% 2,6

health 5,0% 4,9

- variable cost = mainly connected with maintenance of portfolio

- fix cost = does not depend on size of portfolio (management, IT)

- initial cost: sales cost, development

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Classical calculations of insurance premium

There are basically two approaches: Classical calculation:

PV (premium) = PV (liability) + PV (costs) Emerging of profit is not allowed (profit margin) Surrrenders are not considered Return on investment not considered Cost of capital not considered New business strain Not possible for unit linked products

Profit test: Discounted cash flow principle Risk discount rate is considered Basis for serious actuarial calculations of premium

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In the insurance premium calculations for life insurance it is important to remember that it must follow the principle of equivalence.

Principle of equivalence:The present expected value of premiums and payouts is equal to zero.

Random variable L is the variable of total loss of the insurance company. The technical insurance premium is obtained to satisfy the principle of equivalence.

Law of large numbers


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The present value of payouts of the insurance contract is Z. K is the random variable of the time of payouts. The expected present value of the random variable E(Z) is the single

technical premium. For example: endowment Single premium

1 za 0,1,..., 1

za

K

n

v K nZ

v K n

11

:0

E( )n

k nk x x k n xx n

k

A Z v p q v p

P k x x kK k p q


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Technical premium We define a new random variable L as the difference between the

present value of payouts and the present value of premiums paid. Thus chosen random variable may occupy negative as well as positive

values, which presents a loss or a surplus for the insurance company in the sense of value.

The technical insurance premium is achieved by satisfying the principle of equivalence.

E( ) 0L


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1

: 1

:

0,1,..., 1

K

x n Kn

x n n

v P a K nL

v P a K n

: : :E( ) 0

x n x n x nL A P a


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Gross premium

: : : : : :x n x n x n x n x n x nKP a A KP a a


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A simple and generally understandable example of calculation of the technical premium for endowmnet life insurance.

Calculation of insurance premium

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1.Characteristics

Principle of discounted cash flowRisk discount rate is being consideredBasis for any serious actuarial calculation of premiumFor unit linked products the profit test is usedKey test for the decision to launch new productsSensitivity of the parameters can be testedUseful for target cost methodAppropriate set of parameters is very importantThe technical composition of insurance premium is not important

Profit testing

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2. Parameters

Discount rateFixed costs per unit of productVariable costs per unit of productBest possible estimate of frequency and amount of claimsSurrendersInvestment returnsCost of capital

3. Expected cash flow

Profit testing

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Profit testing

Paid premium

Incurred costs at the beginning of the year

Interest earned

Expected cost of claims

Expected cost of survival

CFt is the expected cash flow for the insured person (x), still alive in the beginning of the year t:

Pt

- Et

(Pt - Et )*it

- Dt * qx+t-1

- St * px+t-1

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Then we can define:

4. Principle of equivalence

On the day of issuing the policy the principle of equivalence must be used:

Presuming:

Profit testing

CFt = Pt - Et + (Pt - Et) it - Dt qx+t-1 - St px+t-1

ECt = CFt * t-1px , t = 1,2,..,n

it = i.

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Σ Pt * vt-1

* t-1px = Σ [Dt * vt * t-1px * qx+t-1 + St * v

t *tpx+ Et * v

t-1 *t-1px]

We get

Σ vt* t-1px * [Pt (1+i) - Dt * qx+t-1- St * px+t-1 - Et (1+i) ]=0

or

Σ vt t-1px CFt = 0

or

Σ vt ECt = 0

Profit testing

Principle of equivalence: the present value of cash flow from insurance policy must be equal to zero.

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PROFIT VECTOR {PROt}

PROt =(m-1V +Pt - Et )* (1+ it) - Dt qx+t-1 - (St + mV)px+t-1

Vector { t-1px PROt }, t=1,..,n represent emerged profit from contract

Σ vt t-1px PROt = 0

Profit testing

5. Cash flow with mathematical reserve

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Profit testing

6. Measures of profitability

Net present value

Profit margin

NPV = Σ (1+id)-t t-1px PROt

Σ (1+id)-t t-1px PROt

-------------------------Σ (1+id)-(t-1)

t-1px Pt

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Profit testing

Internal rate of return (IRR)

Σ (1+iIRR)-t t-1px PROt = 0

RP Unit Linked product – Client fund Unit fund

5% 7% 10% Years AV SV AV SV AV SV

1 170,94 0,00 172,81 0,00 175,65 0,00

2 528,95 0,00 538,32 0,00 552,78 0,00

3 1.019,85 968,86 1.045,91 993,61 1.086,69 1.032,36

4 1.588,10 1.508,70 1.642,66 1.560,53 1.729,29 1.642,83

5 2.174,54 2.065,81 2.271,01 2.157,46 2.426,57 2.305,24

6 2.780,02 2.752,22 2.932,95 2.903,62 3.183,54 3.151,70

7 3.406,12 3.372,06 3.631,27 3.594,96 4.006,42 3.966,36

8 4.054,03 4.013,49 4.368,50 4.324,82 4.901,50 4.852,49

9 4.725,50 4.678,25 5.147,81 5.096,33 5.876,14 5.817,38

10 5.421,33 5.367,12 5.971,54 5.911,82 6.937,34 6.867,97

11 6.143,12 6.081,69 6.842,92 6.774,49 8.093,47 8.012,54

12 6.892,40 6.823,48 7.765,26 7.687,61 9.353,56 9.260,02

13 7.671,32 7.594,61 8.742,61 8.655,18 10.727,98 10.620,70

14 8.482,12 8.397,30 9.779,28 9.681,49 12.228,04 12.105,76

15 9.327,15 9.233,88 10.879,82 10.771,02 13.866,07 13.727,41

16 10.209,00 10.209,00 12.049,24 12.049,24 15.655,68 15.655,68

17 11.130,52 11.130,52 13.292,96 13.292,96 17.611,81 17.611,81

18 12.088,85 12.088,85 14.610,88 14.610,88 19.744,83 19.744,83

19 13.081,21 13.081,21 16.003,02 16.003,02 22.066,10 22.066,10

20 14.108,79 14.108,79 17.473,56 17.473,56 24.592,24 24.592,24

RP Unit Linked product –company fund

MONTH 1 2 3 4 5 6 7 8 9 10 11 12

ENTRANCE FEE 3,95 3,89 3,84 3,78 3,73 3,68 3,62 3,57 3,52 3,47 3,42 3,37

AQUSITION 30,00 29,57 29,15 28,73 28,32 27,92 27,52 27,13 26,74 26,36 25,99 25,61

Mf 0,02 0,03 0,05 0,07 0,08 0,10 0,11 0,13 0,14 0,16 0,17 0,18INTERESTS

0,00 0,08 0,08 0,08 0,08 0,08 0,08 0,08 0,08 0,08 0,08 0,08

RISK PREMIUM 2,07 2,03 2,00 1,97 1,94 1,91 1,88 1,85 1,82 1,79 1,77 1,95

CLAIMS 0,93 0,92 0,90 0,89 0,88 0,86 0,85 0,83 0,82 0,81 0,80 0,88

COMMISSION 50,00 49,29 48,59 47,91 47,23 46,56 45,90 45,25 44,61 43,98 43,35 42,74

OTHER COSTS 42,00 1,97 1,94 1,92 1,89 1,86 1,84 1,81 1,79 1,76 1,74 1,71

RETURN OF COMM. 0,00 0,71 1,40 2,06 1,95 2,14 2,22 2,18 2,05 1,82 1,49 1,08SURRENDER PENALTY

0,20 0,39 0,57 0,75 0,92 1,09 1,24 1,39 1,54 1,68 1,81 1,93

CF -56,70 -15,47 -14,35 -13,26 -12,96 -12,37 -11,91 -11,56 -11,32 -11,19 -11,16 -11,12

Profitability measures

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Benchmarks

term insurance – 10 to 18 unit linked – 5 to 12 endowmnet – 8 to 14

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Parameters in determining the premium

Demographic assumptions Return on investment Costs Inflation Surrender Safety margins Expected profit

Risk discount rate (RDR) Profit criteria

Net present value (NPV) Internal rate of return (IRR)

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Mortality tables Incidences of critical illnesses Sickness tables Annuity tables

Incidences must reflect the future expectations of individual risk for insured persons.

This values can be obtained by the transformation of standard population tables.

If the insurance company has enough data, it can include data from its claim experiance.

Alternatively, actual experience from comparable insurance class can be considered.

Demographic assumptions

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For creating one’s own tables, homogenous data for a sufficient number of years is necessary.

If the insurance company has no appropriate data for making incidences, it is recommended, that they be made in the future.

If the company has no appropriate own data, the data on the level of the industry may be used, if it is available.

Data from reinsurance companies can be used. Such an approach is recommended, if we are entering the market for the

first time or if we have no experience with the new insurance class. One’s own tables/incidences have to be constantly checked and

supplemented.

Demographic assumptions

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Factors affecting the actual incidence of mortality: Age Gender Time period from beginning of insurance Sales channels Market segments Cause of claim Suicides

Demographic assumptions - Analysis

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To consider:

Long-term conservative expectations regarding each type of investment (shares, bonds,…)

The scope of investment guarantee affects the type of investment in which the premium is invested

The impact of the expected investment return on the profits from the contract the higher the impact, the greater the accuracy

The impact of the reinvestments of the existing investments Expected investment mix for the product The current return on the investment mix for the product Types of investments (AFS, HTM, HFT)

Return on investment

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Especially important, because it can significantly affect the profitability of the insurance contract.

Cost parameters have to reflect the expected costs through the whole insurance process.

Cost parameters are set for each insurance class on the basis of normal – theoretically justified costs.

Cost have to be determined on the product unit: Depending on the premium Depending on the insurance sum In fixed amount

If the insurance company has no adequate data for cost analysis analysis of similar products using data on the industry level reinsurance detailed analysis of the processes and costs connected to them.

Costs

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Including fixed costs presents a special risk when the number of sold insurance at a fixed cost is estimated in the wrong way

Management, development and marketing costs are usually fixed costs

Fixed costs can be distributed: As a fixed addition to the premium Divided into classes according to the amount of the insured

sum The commission amount is usually the parameter that is set in the

product development phase and presents the market price for the concluded insurance information from market is important reinsurance experiences of countries with a comparable level of development

Costs

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To be considered:

The current inflation rate growth of retail prices growth of wages

Expected future inflation rates The difference between the return of government bonds with

fixed return and government bonds with variable return Medium and long-term economic forecast Rate of economic development

Inflation cost growth

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The level of surrenders should reflect the expected development of insurance in future years

Experiences of insurance companies from the same or from similar products must be considered the market reinsurance

Calculating: 1,2,3,6-monthly rate of resignations 1,2,3,4,.. annual rate of resignations

Average 12-monthly rate of surrender: checking all insurance policies in our portfolio, when they were aged 12 months

Generational sustainability:checking all insurance policies, that were concluded in a given calendar year and are 12 months old

2009 2010

Surrenders

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LR12 = AP>12 / ALLP>12

LR12 average 12-monthly rate of resignations

AP>12 number of policies, older than 12 months, that were alive at the age of 12 months

ALLP>12 number of policies that are or may be aged at least 12 months

1 2 3 25

8%

product idea! include this into pricing

Surrender

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Main factors affecting the rate of surrenders: Time period from insurance entry Sales channels Market segment Premium payment method Type of contract Terms of withdrawal/ exit penalties Frequency of payment Single premium / premium in instalments Medical condition

Surrender- Analysis

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The parameters are initially estimated as the closest approximation When the profit test method is used in calculating premiums, the risk

premium for future whitrawals from assumptions may be included: through RDR Including explicit safety margins on the parameters

When the premium is calculated based on a formula, the additions to the basic parameters are the only way to integrate risk premiums

Examples: Mortality (10% do 20% loading) Costs (10% on the best estimated cost) A conservative rating of the number of sold insurance is assumed

Margins

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RDR

The owners decide where to invest their resources on the basis of:

Benchmarks Risk investment rate Mobility of the investment

Basic rule: the investor will require a higher expected return for more risky investments than for more secure investments compensation for default risk

In other words, investors require a risk premium for the risk they assume

Also investors in insurance companies require a higher return than the return of risk-free securities; therefore the return:

return on risk-free securities + risk premium

Expected profit

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RDR

The questions is, what is the appropriate risk premium in a life insurance company

RDR is not determined only by an actuary, the market also sets the return

At risk work RDR, it has to be considered: Macroeconomic environment Position of the company Product complexity Parameter stability in a product

Expected profit

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NPV

To optimize the NVP is the main priority of any manager Is the best criterion of profitability NPV can be presented in relation to the initial investment (for

example commission) NPV can be presented as a share of total premiums (prices) Can be used for the initial assessment of the value of the

company

IRR

IRR is the interest rate, in which the sum of discounted future cash flows equals 0

If all other assumptions are equal, the company should favour products with a higher IRR

Expected profit

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ABC method in the insurance industry

Allocation of the second stage (activity drivers)

First stage aloocation (cost drivers)

Indirect costs

Cost center of activity 1

Cost center of activity 2

Cost center of activity N

Cost units (insurance classes, customers, business processes, market channels)

Direct costs

• Important method in the insurance industry

• according to research more than 52% of financial institutions in the UK use the ABC method

• CEE is only at the beginning of this process

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Method of calculating costs based on activities is a method that takes into account that costs arise as a results of activities, which are cost drivers.

The basic idea behind the ABC method is that costs are not caused by products and services, but activities, products and services are mainly the end result of such activities.

Activities consists of a concrete business process. The ABC method is a two-steps calculation of costs :

In the first step costs are collected on the activity level, that are consolidated into activity based cost centres or cost pools;

In the second step costs from the activity based cost centres are arranged on cost objects;

The organizations is guided by the activity cost drivers or the activity criteria; The activity criteria is usually set in quantitative units, not in units of value.

Cost objects in the insurance industry are products, clients, marketing channels, markets, individual processes and similar.


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Activities of the insurance underwriting process

Activities of the insured support process

Activities of the claims process

Acquiring the documentationsRisk assessmentObtaining consent of clientsInforming clients of decisionsConcluding the insurance

contract

Collection of insurance premiumCapture the offersConsideration of purchaseConsideration of advanceRenewals of contractsProceedings of unpaid premiumsOther changesProviding information

Application of insurance claimRecording the claimAcquiring the documentationDetermination of paymentIdentification of the bases of

claimsDetermination of the claim

amountPaying the insurance feeNotice of transferArchiving of documentsComplaints

Activities are composed of several tasks

Activities are not necessarily separated organizationally

Beware of the number of monitored activities


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Activity Activities criteria

Report of insurance claim Number of applications

Registration of the insurance case and opening the claims file Number of registrations

Acquiring the relevant documentation Number of documents

Determination of the amount of reservations according to the survey

Amount of registration

Determination of the base of the claim Number of registrations

Determination of the amount of the claim Number of insurance claims

Paying the insurance fee Number of payments

Notice of transfer and the termination of the settlement of the claim

Number of transfers

Archiving of documents from the claim files Number of insurance claims

Complaints Number of complaints


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ABM

ABC as the by-product provides information about the costs of individual activities in a business process.

The use of this information and making business decisions based on such information is the basic concept of the activity based management (ABM).

The ABM concept is used in different methods of cost management: Reduce costs, Activities based planning, Business performance measurements, Benchmarking, Reenegenering business processes.

Business process elements

Activities Performance measures

Cost drivers

Cost objects

Process aspect

Aspect of calculating costs

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The use of ABM in the insurance industry

Traditional analyisis ABM analysis Acitvities measurement

#

Wages 5000 Application of insurance claim

500 Number of applications

1000

Travel expenses 500 Registration of the insurance case

1500 Number of registrations

900

Information technology

1500 Determination of amount of the claim

5000 Number of claims 900

Rent of premises 1000 Paying the insurance fee 700 Number of fees 1300

Total 8000 Complaints 300 Number of complaints

10

How much was spend? Total 8000

For what purpose was it spend?

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Actuarial models for premium determinationThe link between profits test and ABM

Cost of activity (ABM)

Actuarial model (profit test)

Insurance premium

Costs of claims

Time component of cost

Probability of the formation

Cost amount

Activities of the insurance admission process

Activities of the insured person’s support process

Activities of the claims process

Acquiring the documentationsRisk assessmentObtaining consent of clientsInforming clients of decisionsConcluding the insurance

contract

Collection of insurance premiumCapture the offersConsideration of purchaseConsideration of advanceRenewals of contractsProceedings of unpaid

premiumsOther changesProviding information

Application of insurance claimRecording the claimAcquiring the documentationDetermination of paymentIdentification of the bases of

claimsDetermination of the claim

amountPaying the insurance feeNotice of transferArchiving of documentsComplaints

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The costs of activities are taken into account instead of the classical costs criteria.

The probability of event is determined for the activities. The majority of activities are connected with the basis probability of

the insured event. Activities are included in the profit test model according to the

formation time in the life span of an insurance product.

Actuarial models for premium calculationThe link between profits test and ABM

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Target costs - definition

1. The process of target costs is a system of profit planning and cost management that is:

Price oriented Focused on costumers Focused on development, and Cross functional.

The concept of target costs initiates cost management at the earliest stages in product development and is used trough the entire product life span with the active involvement of the entire value chain (Anasari).

2. The concept of target costs in the insurance industry is defined as a comprehensive system of proactive cost management from the development of a new product to sales and marketing of the insurance product, or in the entire demand period for insurance services in terms of insurance admission, the insurance claims process and the customer support process. Based on the result that costs cannot be controlled with standard cost systems, as recognised by the market and the competition.

3. Target costs are different from the traditional calculation of costs plus in the way that the target costs are the function of the product’s market price, the desired profit and market share, and not on the contrary, that the selling price depends on the projected cost. With the target costs method the profit and cost structure of the product is determined, even before we start to its development.

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The price of the service determines the costs (the costs of claims and the operating costs) and not vice versa

Customer oriented Focused on development Functional integration in the development of new products

(important in the insurance industry) Orientation to the long-term cost management

- life insurance is a long-term contract Cost management in the entire value chain

Target costsThe characteristics of target costs

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The premium sets the costs

Orientation to customers

Focused on development

C P

Planning phase

Design and construction phase

Implementation phase

Testing phase

Target costs concept

Meeting the customer’s expectations regarding quality, price and speed of service

The market price defines the develomplent of a new product

The most costs of the products are defined during the development phase


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Functional connectivity in development

Actuaries UnderwritingClaims Insurance administrationInformaticsMarketingSalesLawReinsurance

Multidisciplinary project group of the new product development


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Planning a new product Determining target costs

Determining the market price Determining the target profit Definition of target differences

The use of techniques to achieve the target costs

Process of target costs

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Endowment(basic risks)

CI

Option of retraining the insurance into insurance in perpetuity

Option of raising the insured sum in the event of childbirth

Additional accidence insurance

Waiver of premium payment in case of unemployment

Protecting the family in case of illness

Waiver of premium payment in case of illness

…

Premature redemption

Insurance inactivity

Premium return guarantee

Without medical examination

Amount of basic coverage

Premium payment method – free or bound

Profit sharing

Additional risks

Initiative

Pricing strategy

Marketing strategy

Market research

Realizability study Product concept

Insurance coverage, options

Insurance conditions

Insurance documentation

Risk management

processing

Prototype 1

Prototype 2, …

Final form

Insurance premium

Decomposition of insurance product

Product development phases

Planning a new product

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MARKET PRICE

Strategic goals of the company

Long-term profitability

Market share

Reputation

Customers

Value of detection

Loyalty

Competition

Quality and relative functionality

Price

Key factors:

Value of percetion of added options and functionality

Brand power

Target market share

Determination of target costsDetermination of market premium

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Net present value (NPV)

Internal rate of return (IRR)

Net present value share in the initial commission

nk

k 1

CFNPV

(1 )kRDRi

nk

k 1

CF0

(1 )kIRRi

NPV

commission

Determination of target costsDetermination of target profit

65

Target difference

Target costs Planned costs

Cost analysis Methods to reduce costs

To calculate the target difference it is necessary to know how much we spend today!

Determination of target costsDetermination of target difference

66

Year

Gross Operating Costs of Change Interest on Cost of

premium costs claims MR MR capital

0 980,00 - 690,00 0,00 - 541,17 0,00 0,00

1 786,39 - 40,32 - 59,50 - 769,86 29,76 - 2,60

2 645,02 - 33,58 - 91,97 - 676,07 72,11 - 6,29

3 546,29 - 28,89 - 77,22 - 664,97 109,29 - 9,54

4 462,63 - 24,85 - 89,91 - 615,27 145,86 - 12,73

5 391,73 - 21,38 - 97,65 - 568,30 179,70 - 15,68

6 331,64 - 18,39 - 101,52 - 523,95 210,96 - 18,41

7 280,74 - 15,83 - 102,43 - 482,17 239,78 - 20,93

8 237,62 - 13,62 - 101,09 - 442,89 266,30 - 23,24

9 201,11 - 11,72 - 98,12 - 406,00 290,66 - 25,37

10 0,00 0,00 - 1835,43 5690,64 312,99 - 27,32

NPV 4863,17 - 898,58 - 2654,83 - 1930,90 885,00 - 77,24

Planned Market Target

costs premium profit

1 2 3

Commission 490,00 Premium 4863,17

Other operating costs 408,58 Interest 885,00

Claims 2654,83 Result - 1930,90

Capital - 77,24

Total 3553,41 3740,02 245

Market premium 980,00 EUR

Target profit50 % Paid commissions

245 EUR

Cost share 14 % From gross premium

Target costs Target difference

3495,02 58,38

Determination of target costsExample profit test

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Category Method

1. Development and marketing

- Commissions - Analysis of the impact of reducing commissions on the sales range

- Search for new sales channels

- Other initial costs ABC/M

2. Customer support process ABC/M

3. Claims - Quality risk management system- Actuarial control cycle

Insurance premium

Operating costs

Costs of claims

Distribution of target difference

Current costs

Target costs Target difference

Commissions 490 490 0,00

Operating costs 408,58 369,16 39,42

Claims 2654,83 2635,10 19,73

Total 3553,40 3494,26 59,15

Determination of target costsDecomposition of target costs in the insurance industry

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Methods: VE ABM Risk management BPR Benchmarking

Two-stage implementation of target costs

1. Manufacture of the product that will be as close as possible to target costs -> Analysis of value

2. Design and implementation of activities associated with business processes -> ABM

Implementation of target costs

Mixed life insurance(basic risks)

Additional insurance for the risk of major diseases

Option of retraining the insurance into insurance in perpetuity

Option of raising the insured sum in the event of childbirth

Additional accidence insurance

Exemption of premium payment in case of unemploymentProtecting the

family in case of illness

Exemption of premium payment in case of illness

Advance

Premature redemption

Insurance inactivity

Premium return guarantee

Without medical examination

Amount of basic coverage

Premium payment method – free or bound

Profit sharing

Additional risks

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Functionality of the productDesired properties of the product from the customer’s perspective

As little administration as possible

Covering various life events

Living benefits

Flexibility

Safety for the family

VE presents a systematic, interdisciplinary study of

factors affecting the costs amount in a product, in

order to determine whether it can be created

at lower costs, without sacrificing the

characteristics, functionality, reliability

and usefulness of the product.

Value engeneering

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ABM process

Identifying the main activities in the company Allocating indirect costs to cost units of activities Selection of appropriate criteria of activities

Implementation of target costsABM

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The business of the company is viewed as a chain of related activities

Obtain information about the main activities in the company Based on thus obtained information, we can eliminate

unnecessary activities The basis for the use of different cost management techniques Primarily it is a activities management model within the company


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Supplementing ABM and target costs In the insurance industry, we follow the process logic

ABM follows the process logic When activities are cost categories, the target difference can be

arrange more specifically By allocating target costs by activities, a more accurate picture can

be obtained, where the target difference is formed ABM

Specifies the target difference by activities By managing activities their costs are reduced


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Standard costs

TARGET COSTS

Target difference

MARKET PRICETARGET PROFIT

BSC (strategy, vision)

Profitability

Market share

Reputation

Customers

Value Loyalty

Competition

Quality Price

Profit test

ABC/M – activity analysisRisk managementRedesigning business processBenchmarkingAnalysis of valueQuality assurance

Procedures supporting the target costs achievement in insurance

The model of target costs in the insurance industry

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КРАЈ

Documents

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