The Investment return rate for discounting cash flow.

The actuarial control cycle describesa crucial process by actuaries to assist takaful operators to manage their fundscontributed by participants based on a sound financial basis. Actuarial controlcycles can be divided into three main steps which are:1.    thepricing steps2.    theexperience monitoring steps; and3.    theliability provisioning step. The objective of pricing as follows:1      Evaluate the adequacy of the benefits promised.2      Must be fairly valued for policyholders.

No unfairsubsidization must exist in any class insured by any of the insured classes.3      Rate cannot be excessive in relation to benefitsprovided. Pricing Involves datacollection, assumptions and other relevant inputs required. In process of determining theprice, actuaries need to make assumptions as follows:1       The pattern of mortality /morbidity / claims distribution2       Investment return rate fordiscounting cash flow.

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How much investment profit can be expected by theoperator in the future from the takaful contribution received at the outset ofthe policy.3       Management expenses rate formarketing and processing4       Withdrawals pattern thataffect 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 takafulbusiness.6      Contingencies.It is always possible that there might be a significant error in pricingdue to the incorrect use of assumption, especially when involving keyassumptions. Actuaries need to understandthe nature of the data and the statistics obtained and the degree of usabilityof the particular product portfolio or business concerned. Actuaries’ task inpricing and re-pricing of products also include the relative weightageconsiderations to place on pricing factors which derived from internalexperience as well as external resources. Normally, in the pricingprocess, actuary will face two dilemmas: 1. If the price is tooconservative, it will not be fair to the insured.

If it is too aggressive, itmight be inadequate. In this circumstance, who should be pay for any deficits?2. Legislation may require theestablishment of conservative reserves that result in new business strain. Inthis circumstance, who will bear financing strain? Pricing of any product shouldgo beyond the cost of future liabilities and it should also take into accountthe desired return on the shareholders’ funds, as well as current marketplacefeatures. After established the price and selling some products, the companythen concerned with setting aside the appropriate level of reserve for companyfuture benefits. The overall success in pricingdepends on the pricing and Rational and Consistent underwriting rules.

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