Components of Product Profitability - Provisions & Claims

Components of Product Profitability include; revenues, funds transfer prices, operational costs, specific and general bad debt provisions and claims. Finally - Provisions and Claims

The majority of banks raise specific provisions at the individual customer level without allocating provision coverage against individual products. However, to analyse product profitability effectively, it is necessary to review profitability at three levels: gross profit, net profit after deduction of operating costs and net profit after deduction of operating costs and specific bad debt provisions. It may therefore be necessary to modify provisioning procedures to ensure that specific provisions are established at the product as well as customer level. An associated issue is whether it is appropriate to designate general provisions to individual products (perhaps in relation to risk/asset weighting).

Claims can normally be identified by product or policy type, but may relate to products undertaken in previous accounting periods. As profit margins are squeezed, actuaries begin to examine the underwriting assumptions on which their calculations are based. Many insurers are now facing problems because they have not conducted their business on a sufficiently conservative basis and so are having difficulty meeting continuing administrative costs and claims received.

Increased technological developments in medicine also increase the incidence of claims on life assurance and health insurance as incidents can be traced back to insured risks (such as asbestosis). This tends to be most common in the USA. Policies that may generate claims relating to activities undertaken in past policy periods creating 'long tail exposure' give rise to further uncertainty on profit margins, such as employer's liability claims, relating to health hazards in the working environment, which may not be identified until years after the period of employment.

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