What is pricing?
the process of determining the amount to charge for a product.
charge a price high enough to generate the revenue needed to cover the products total costs and produce a profit, but not so high that customers buy competitors products.
What is insurance product pricing based off?
on assumptions about the ecnomy, interest rates, revenues, sales risk, usage and other factors.
What is the “price” of an insurance product?
the premium rate charged.
What must be considered when making pricing decisions for insurance products?
- costs
- customers
- demands
- competition
- regulatory requriements
- cost of benefits
- investment earnings
- modeling results related to expenses.
What is costs a major factor that influences the pricing of producsts?
it sets the lower limit for the products price because no company can sell its products below cots and survive
Operating costs results from what?
developing, prodcuing, marketing, distributing and servicing a product- into the premiums they charge for Li products.
Operating costs can be classified into direct or indirect costs. Define these.
Direct: any cost that is specifically rateable to or caused by a particular product
Indirect: cost that is not directly tracable to any single product. ie: CEO’s slary.
Operating costs are also classified as fixed or variable costs. Define these
fixed: remain constant regardless of the amount or volume of a product sold.
Variable costs: change in direct reponse to changes in the number or units products and sold.
What affects the interest rates an insurer earns on its invested capital and interest rates paid to consumers on some products?
Rise and fall in response to market interrest rates.
What can influence a customers ability and willingness to purchase products at various prices?
- purchasing power: the measure of the customers ability to buy goods and services ie: income, credit assets.
- price consciousness: measure of the importance a specific customer attaches to price and also awareness of particular prices
- brand awarness
- perceived risk.
Define the term “Demand”
an economic term for the number of units of a product that a company can sell under given conditions.
- affectd by economic conditions, product availability, substitute products, factors in marketing mix and value placed on a product.
Define the economic theory “law of demand”
states, as a general rule” the demand for a product is inversely releated to the product’s price.
What is “price elasticity of demand”
a measurement of how demand changes in relation to price changes and is calculated as
(percentage change in quantity demanded) / (percentage change in price)
What does a product have elastic demand?
if a change in the products price results in a greater than- proportional change in the quantity demanded for that product.
ie: large screen televisions
When does a product have ineslastic demand?
if a change int eh product’s price results in a less-than-proportional change in the quantity demanded for the product.
ie: water.
What factors affect the price elasticity of demand for a product?
- number of substitutes products available.
- need associated with the product
- the level of expenditures required to purchase the prodcut.
Do insurance companies have less or more flexibility in changing establish prices compared to other industries?
less, since they are long-term products and in most cases the prices are set once the contract begins.
Name some insurance regulatory influences that affect premium rates.
- insurers must include a certain benefit or guarentee that will affecg the premium rate that insurers charge for the prodcut because the premium must be high enough to cover the cost fo the benefit
- state departments require insurers to file premium rates and certify a max rate they will charge for any insured for all products offers.
- state nonforfeiture laws require insurers to include minimum vales in all cash value life insurance policies, relative ot the face amount and duration and impose minimum income benefits on deferred annuities, relative to premium mounts.
- some state insurance laws require insueres to use gender neurtal pricing.
The first step in pricing a product is to set up the pricing objective. What is this?
it describes what a company wants to achieve when pricing a prodcut.
- can be short or long term
- can vary product to product.
- stated in writing and specific the time period for pricing goals.
- this is periodically reviewed to make sure its meating it;’s objectives.
Pricing objectives can be grouped into 3 primary categories, Name them.
- profit-oriented,
- sales-oriented,
- competition-oriented objectives.
Define profit-oriented pricing objectives
they focus on the amount of profit that a company wants to generate.
- expressed in absolute or relative terms
How do businesses maximize profits?
increase sales and reduce costs.
- difficult to predict
- difficult for companies withy large number of prodcuts or product lines.
what is the most commonly used type of profit-oriented objective?
target return objective. which sets a specific level of profit as the goal.
- can be company wide or product specific
Define a Sale-oriented pricing objective
focuses on a specific level of unit sales or dollar sales that the company wants a product to generate.
