The for discounting cash flow. How much investment profit

The actuarial control cycle describes
a crucial process by actuaries to assist takaful operators to manage their funds
contributed by participants based on a sound financial basis. Actuarial control
cycles can be divided into three main steps which are:

1.    
the
pricing steps

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2.    
the
experience monitoring steps; and

3.    
the
liability provisioning step.

 

The objective
of pricing as follows:

1      
Evaluate the adequacy of the benefits promised.

2      
Must be fairly valued for policyholders. No unfair
subsidization must exist in any class insured by any of the insured classes.

3      
Rate cannot be excessive in relation to benefits
provided.

 

Pricing Involves data
collection, assumptions and other relevant inputs required.

In process of determining the
price, actuaries need to make assumptions as follows:

1       The pattern of mortality / morbidity
/ claims distribution

2       Investment return rate for
discounting cash flow. How much investment profit can be expected by the
operator in the future from the takaful contribution received at the outset of
the policy.

3       Management expenses rate for
marketing and processing

4       Withdrawals pattern that
affect the recovery of initial expenses incurred (related with marketing,
underwriting and the issuance of new business contracts)

5      
Tax rate, statutory reserving requirements, factors affecting takaful
business.

6      
Contingencies.

It is always
possible that there might be a significant error in pricing due to the
incorrect use of assumption, especially when involving key assumptions.

 

Actuaries need to understand
the nature of the data and the statistics obtained and the degree of usability
of the particular product portfolio or business concerned. Actuaries’ task in
pricing and re-pricing of products also include the relative weightage
considerations to place on pricing factors which derived from internal
experience as well as external resources.

 

Normally, in the pricing
process, actuary will face two dilemmas:

 

1       If the price is too
conservative, it will not be fair to the insured. If it is too aggressive, it
might be inadequate. In this circumstance, who should be pay for any deficits?

2      
Legislation may require the establishment of conservative reserves that
result in new business strain. In this circumstance, who will bear financing
strain?

 

Pricing of any product should
go beyond the cost of future liabilities and it should also take into account
the desired return on the shareholders’ funds, as well as current marketplace
features. After established the price and selling some products, the company
then concerned with setting aside the appropriate level of reserve for company
future benefits.

 

The overall success in pricing
depends on the pricing and Rational and Consistent underwriting rules.

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