• Overview
• Determination of Winner
• Using Pricing Screen
• First Year (Round)

Fixed Marketing Budget

Description: The marketing budget is the fixed amount of money to be spent by your company for marketing and related areas. It covers all of your home office and field marketing and sales expenses other than actual commissions and management overrides or comparable costs that vary with production success. Enter your budget for the year and then press ENTER. During the three or four years of the simulation the marketing budget amounts accumulate, and the total amount to date, rather than the annual figure, is the value used in determining market share in any year.

This budget can be reset every year for that year. It is the first item when starting the annual pricing. During the pricing tests you make, this expense is included in the determination of the various estimated profit results. If you wish you may reset your marketing budget decision again during the pricing.

Impact: Since the true impact of any fixed expense cannot be known until the volume of business actually sold is determined, the impact is estimated in the pricing analysis process. This is done by dividing the fixed marketing budget by the average amount of total new premium expected to be captured by your company in the current year. This converts the fixed budget to a percent of expected premium.

If actual experience is such that your company captures more than its expected share of the market, your actual expenses per dollar of premium will be lower than expected, and your profits higher. On the other hand, if your market share is smaller than expected, your fixed expenses will be spread over a smaller base and your actual profits will be lower than expected.

To test this, the pricing analysis spreadsheet allows you to enter an estimate of your expected market share. An entry of 1.0 in this field represents 100% of your team's pro-rata share of total market premium for new sales. Likewise, .9 indicates 90% and 1.2 indicates 120%. This expected market share for each team is determined by dividing the total market premium available by the total number of teams, both real and "phantom". You will want to vary your expected market share, and/or your actual marketing budget, to test profit sensitivity of your pricing effort to changes in these items; more about this later.

Pricing Whole Life

In the first year you will do pricing analysis of a $50,000 whole life insurance plan for a male non-smoker, age 45, issued on a standard medical basis. The pricing screen for the Whole Life product is shown in Figure 3.

Figure 3

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Items You Control

There are several product design elements which will affect the profitability of your product and which you directly control:

Premium per Thousand of Face Amount: The lower the better in terms of marketability, but just the opposite for profitability.

Policy Fee: A fixed, annual charge levied against each policy. This will increase the premium per thousand by an amount equal to the policy fee divided by the face amount of the policy in thousands.

Agent Commissions (or a comparable estimate of variable sales expenses): Commission rates for years 1-20 may be entered, and rates may vary from year to year.

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Management Overrides (or a comparable estimate of variable sales management expenses): Enter a first-year override rate as a percentage of the first-year premium, and a renewal year override rate as a percentage of renewal premiums.

Items You Must Estimate

There are additional product design elements which will affect the profitability of your product and which you can only estimate from the information you receive. These are the estimates of future experience you make to test anticipated profitability, or the ability to be profitable, given a set of assumptions.

Earned Interest Rate: The interest actually earned by your company in the future will depend on how you invest your assets, your actual cash flows, and future interest rate changes from year to year. Since the combined impact of those variables can not be known precisely in advance, you must estimate future investment earnings in order to calculate anticipated profitability. The anticipated earned interest rates from your asset selections are the initial values shown on the pricing screen. The pricing model allows you to estimate future investment earnings in order to test profitability under different earnings scenarios.

Lapses (or Persistency): Policy lapse rates are another unknown that can only be estimated at the time of pricing analysis. Actual experience depends on future events. The pricing analysis screen starts with a common lapse table that is generally appropriate for the marketplace. Renewal commissions also affect the final tested lapse rates; higher renewal commissions generally produce lower lapse rates. By changing the Lapse Multiples you can test the sensitivity of your results to lapse rates different than expected. You can input a Lapse Multiple for the first year and another for renewal years. A Lapse Multiple of 1.15, for example, will increase the lapse rates in the common lapse table by 15%. Viewing the Lapse Table item allows you to view, but not change, the lapses adjusted for your commissions and multiples.

Market Share: You may want to test for the effect of various amounts of new premiums for your company by assuming that you capture a certain share of the available market. To assist you in estimating your potential market share, a "Market Analyzer" is available. This will allow you to compare the key elements of your pricing effort with average results from your industry competitors' products provided by Market Research. It will also estimate your expected market share based on that comparison. See Figure 4.

Figure 4

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To use the Market Analyzer while pricing your whole life product, move the cursor to where you would normally enter your estimated market share and press ENTER. This will send you directly to the Market Analyzer screen where the product pricing elements you currently have in your pricing analysis spreadsheet will be displayed. Enter your estimates for comparable information representing the average industry product; this information may be available from a Market Research survey conducted during the round. Press F9 after you enter the estimated industry averages to recalculate your expected market share. If you manually change your market share, your estimated premium at market share will be recalculated.

Mortality: You may test the sensitivity of your product pricing to changes in mortality by altering the mortality multiple shown on the pricing screen, similar to the way you can change lapse multiples. Viewing the Mortality Table item allows you to view, but not change, the mortality table.

Pricing Results

The following results will be displayed on the product pricing screen each time you recalculate:

Break Even Year: This is the first year your company makes money on this policy after recovery of the initial "drain" of committed funds and other required surplus resources plus interest on that investment at the assumed earned interest rate.

Rate of Return on Surplus Committed: This is the interest rate that equates the present value of the surplus committed in the early years to the present value of the surplus gained in the later years of the policy. This can be thought of as the annualized rate of interest you would earn if you lent someone the amount of the early years' statutory losses and they repaid you with the later years' earnings. Surplus committed is the amount you actually spend plus the reserves and allocated surplus that are required by your product at the production level or market share shown.

PV Profit/PV Premium Issued: This is the present value of profits discounted at the earned interest rate divided by the present value of premiums discounted on the same basis. It is expressed as a percent, and is a measure of the profit margin in the premium expressed on a levelized basis.

GAAP Premium/Total Premium: This is the ratio of premium required to cover benefit costs to the total premium which you are charging, based on the assumptions.

Expected Results (at Market Share): These three values will help you estimate the impact of your pricing decision on the value of your company:

The "1st Yr New Business Strain" is usually a negative. It estimates the reduction in available surplus as of the end of the current year caused by the business issued during the year for this product.

The "End of 1st Yr Value Added" estimates the increase in value as of the end of the current year caused by business issued during the year for this product.

The "Net New Business Value" is the net of the two prior values and measures the extent to which your product design is causing your surplus to be leveraged.