20. Contract design Flashcards
Factors
Hint:
Can Pigs Make Cool Financial Rockets? Great Success Certainly Requires Astute Control.
- Can: Customers needs
- Pigs: Profitability
- Make: Marketability
- Cool: Competitiveness
- Financial: Financing
- Rockets: Risk
- Great: Guarantees
- Success: Sensitivity of profit
- Certainly: Cross-subsidies
- Requires: Administration systems
- Astute: Consistency
- Control: Regulation
What are some reasons to design new product?
- Awareness of gap in product range
- Awareness of inadequacy in a product
What might have caused an awarenss of a gap in an existing product range?
- Comparing products with competitors or across markets
- Market awareness of new product need / feature
- New financial instruments making product feasible
- Financially attractive legislative or fiscal change
Why might an existing product be inadequate?
- Low profitability
- Capital inefficiency
- Inappropriate premium basis / charging structure
- Demographic shifts
- Changes in investment return outlook
- Changes in expense experience
Customers’ needs are influence by
Capacity to pay
Risks covered
Benefits needed at different times in the future
Attitude to financial risk
Provider’s needs are influenced by
Chosen market
Available capital
Available expertise
Why is profitability important when designing a new product?
Non-linked:
Want to premiums to cover benefits and expesnes and provide profit margin
Unit-linked:
Charges cover expenses and provide profits
Improving marketability
- Innovation [options + guarantees]
- Simplicity
- Transparency
- Low charges
Options related to premiums
- Waiver benefit
- Increase/decrease premium
- Payment frequency
Options related to benefits
- Lump sum vs regular income
- Protected no claims discount
- Adding rider benefits
Why do unit-linked contracts require less financing than non-unit lined products?
- No (or few) expense guarantees
- No (or few) mortality guarantees
- No (or few) investment guarantees
- Possible smaller supervisory solvency margin requirement
How can capital strain of non-linked contrat be reduced?
Reduce initial acquisition costs
Reduce initial administration costs
Reduce valuation strain
- Increase valuation interest rate
- Reduce guarantees
Why is risk an important factor in product design?
Risk of product must be in line with company’s ability or willingness to retain or reinsure it.
How can company manage large parameter risk?
- Offer contract in unit-linked and/ or reviewable premiums/charges
- Reinsurance
- Margins
- Offer contract as a rider
Types of guarantees
- Mortality
- Interest
- Investment return
- Expenses
- Charges
- Surrender value
- Annuity option
- Renewability with no further underwriting
