24 Contract Design and Pricing Flashcards
1
Q
What are the factors to consider when assessing a contract’s design? (39)
A
- Profitability
- Profit criterion (RoC, Payback Period)
- What are the cashflows?
- Key pricing assumptions
- NB volumes required
- Advice or data required?
- Marketability
- Customer needs / choices
- Competitors’ products
- Tax and State Benefits
- Features (gtees, SVs, fund choice)
- TCF
- Capital Requirements
- Onerous gtees?
- Hedging (derivatives or reinsurance)
- Measurement
- Development costs
- Initial capital required?
- Sensitivity of Profit
- Margins
- Risk drivers
- Risk mitigations
- Scenario testing
- Diversification with other products
- Distribution
- Sales channels
- Additional training
- Reputation & TCF
- Remuneration
- Underwriting philosophy?
- Admin Systems
- Systems
- Training & Literature
- Service Standards
- Outsourcing
- Struggle with high NB volumes
2
Q
Outline how to set the mortality assumptions when pricing a contract. (5)
A
- Adjust a standard table using either the company’s past experience or CMI or reinsurer’s data.
- Adjustments should be based on the expected nature of the policyholders to whom the business will be targeted.
- For a product with longevity risk, allow for future mortality improvements.
- Consider the level of underwriting and the potential for anti-selection.
- The impact of anti-selective withdrawals may also need to be taken into account.
3
Q
Outline how to set the investment return assumptions when pricing a contract. (5)
A
- Consider likely matching assets and their expected yields.
- If corporate bonds are being used, consider the likely higher default risk and lower liquidity relative to government bonds - this can be allowed for explicitly if stochastic modelling is used.
- If a market consistent approach is being used, the yields used would be based on risk-free rates and may be term dependent (yield curves).
- Allow for any financial guarantees using option-pricing theory or by modelling stochastically. Assumptions would be needed for the generation of economic scenarios and the correlation between factors.
- Adjust assumed yields for any investment risk in future years (stochastic modelling could again take this into account explicitly).
4
Q
Outline how to set the expense and inflation assumptions when pricing a contract. (6)
A
- Look at recent expense investigation for this or a similar type of contract. If no such data exists, use a reinsurers or consultant’s experience.
- Decide whether the contract will be required to take on a share of overheads and if so what proportion.
- When loading for overheads and development costs, allow for the expected volume of business and expected average size of contract.
- Allow for the likely incidence of costs, e.g. initial vs ongoing in order to reduce cross-subsidies.
- Allow for inflation at a rate consistent with the investment return assumptions.
- If applicable, commission would be loaded at the rates the company expects to pay.