Product Model Review in Insurance Assignment Paper (Essay Sample)

Product Model Review in Insurance
Student Name
Institutional Affiliation
Product Model Review in Insurance
Assessment of the Current Model
In the past decades, different insurance companies are emerging with different strategies to gain competitive advantage in the market. Any insurance company must have a mechanism of evaluating the current trend in the market and defining a pricing model that is sufficient to enable the company understand the production cost of every product they come up with. The truth remains that in insurance sector, it is not easy to calculate the cost of the product since a policy is not a tangible product like in any production industry where there could be a fixed value for a particular product.
Currently Blackmore insurance company has defined a Universal life (UL) product that is subject to evaluation using different risk management strategies to be of return. The current problem in the company is to come up with a pricing model that is able to offer balance between the customers as well as accommodate the suggested changes in their pricing. The existing model has a constraint of having a fixed rate of contribution by the policyholders and standard compensation in case of a claim. However the problems remain that there is no defined way of adjusting the rates to retain the existing customers and attract new ones.
There is a risk associated with the current model in that; it is based on the fixed contribution and allocation of the compensations. The dilemma remains that the company needs to define a way of measuring the occupation, location and lifestyle of the policyholders. This is not defined within the pricing model that might result over payment during compensation resulting in losses to the company (D'Arcy, Stephen, James, 395). The model could be appropriate if it could define the insurable risks within the product and quantity of the insurable value rather than defining a guaranteeing a general interest option and equity-based account of 50% and 25% respectively. There is need to review the model and come up with changes that will focus on predictive modeling, data exploration, competitive intelligence and high performance analytics (Dowd, Kevin, et al, 2008). Most of these constraints will be based on the evaluation and analysis of the historic data for the past 10 years.
Recommendation for the Model Revision
The suggestion for the new model would be for Blackmore company to focus on the insurance risk management strategies such as; financial impact where the threshold limit will be set to offer a balance between the size of the company and the measure of the incidence. It is also important that the proposed model must be able to measure the probability of occurrence of risk by evaluating the risk as Medium, low, high and very high.
The proposed model should also be able to identify both the internal and external pure risks, setup inspection and auditing of the risk. Before making compensation, it is recommendable that the existing risk should be thoroughly scrutinized based on the coverage, rates and the deductions to be made. A standard SOAP for the claims control should also be defined for controlling the claims. In selecting the best model for the insurance company, different constraints and factors should be considered as below.
The valuation date should be chosen based on the most recent quarterly reporting. The most preferable period would be the year-end valuation dates. These dates could be chosen from the most resent reporting period. More than two alternatives could be chosen to change the model and update it. The decision made will depend on the time and budget. The suggested changes would be more appropriate when deciding on the model validation and historic performance of the model is a crucial factor to consider during this process.
The primary reason for changing the model is in order to estimate the value of the distribution channel (Feldblum, S., & Thandi, N., 2003). There are different forces that would influence the amount of money a customer is willing to pay for the policy and this will be based on the new business production as reflected in the suggested changes in the pricing model. The level of the premium production level is also a constraint to consider at this point. Having operated for the past 10 years, the period is enough to allow the company use it as the base case since this is able to help in projecting the weight of profitability for the new projection period in the pricing model.
The other factor that should be considered while modeling the pricing model would be individual life modeled based on the valuation date. This approach is build in order to increase flexibility and change the profit margin in the company. The three characteristics earlier defined in the pricing model are not enough. There is need to include more characteristics of the policyholder such as face, amount and rate class. In order to replicate the policy mechanisms well, there must be validation of the policy level. In the case of UL policies, illustration systems will be used as compared to the traditional policies where there was reservation and non-forfeiture value being provided by the company.
Another important constraint will be individual life riders which when combined with built-in benefits will make up the portion of the premium in generating new markets and yielding more profits. Rider pricing usually assumes that the base policy is used to cover the expenses. Paying attention to this factor helps the policyholders to understand their benefit and their coverage. Loss-ratio technique is the best model-to-model riders by substituting age-dependent risks with equivalent loss ratio. This model would enable compromising of the riders’ premiums generation if they run separately.
Recommendations for sensitivity testing improvements
During the sensitivity tests in any deployment of a model, different assumptions are made to determine the parameters with the biggest impact. The question on how to set new values to ensure that every entity-to-entity is done correctly needs some assumptions. In this scenario, the first assumption would be that every adjustment in the interest of 2% would mean adjusting the contribution by 2% to sustain the profit balance. Also there is need for free withdrawals provided. The withdrawals should only happen at the maximum of 10% per year...