7. Product design and stakeholder interests - (2)

Question 1

Insurer as the stakeholder

Answer 1

Product design and pricing adjusted so targets met:
- customer acceptability
- regulator requirements
- distributor needs
- price competitiveness
- adequate profitability/ return on capital
- systems and other internal constraints
- underwriting methodology
- company culture in product style and price

• risk pricing (reinsurance)
• financing requirements
• cost of offering guarantees
• premium/ benefit change at renewal/ review

Question 2

Profitability/ return on capital

Answer 2

• profitability of a product will be a function of amount sold and profit margin per policy
• sufficient margins must be retained to ensure adequate return on capital
• premiums charged must be sufficient to cover benefits and expenses, and meet required profit criteria

Question 3

Administrative systems implications

Answer 3

Key consideration for actuary wrt systems
- computer system must record all processes of insurance
- provide information to enable profitability to be assessed
- new products may require system reorganisation
- expenses relating to system changes must be included in product costing
- time allowed for development and testing

Information technology must
- capture individual policy details at inception
- align these to claims information
- combine policy and claims data to monitor profitability
- group by risk characteristics
- able to add external data as appropriate
- able to model and project

Question 4

Underwriting methodology

Answer 4

• medical underwriting and policy acceptance will affect product design and pricing
• claim procedures should be consistent with underwriting criteria, data underpinning the pricing calculation, policyholder expectations and competitor practices

Question 5

Risk pricing

Answer 5

• clear set of conditions and policy rules provides a framework for statistical costing of benefits, by being able to predict future outgo
• to do so, the actuary will seek most up-to-date relevant statistics and data
• reinsurance assistance can be a key factor in provision of statistics, contract design and pricing

Question 6

Cost of guarantees

Answer 6

Offering guarantees poses the following problems
- having to suffer unexpected cost (possibly)
- reserving from the outset (capital strain)

Guidelines on offering guarantees
- ensure there is a customer need
- price as accurately as possible, projecting a range of potential outcomes
- charge cost of capital to the product, if possible
- obtain sound reinsurance, building into the product if necessary
- ensure marketing and other policy literature clear in description of guarantee
- ensure sales process explains clearly any guarantees and their implications for premiums and benefits
- ensure adequate reserves are in place when the business is written

Question 7

Product-specific control procedures

Answer 7

PMI
- control claim costs by agreeing and monitoring provider prices
- control claim costs through pre-authorisation of benefits
- ensure price increases can be justified to the policyholder on renewal

CI
- effective underwriting and claims control to protect against anti-selection and non-disclosure
- imposing a survival period on stand-alone policies
- adequate reserves to cover later notified claims
- manage policyholder expectations in light of new diseases and market changes (e.g. extend or restrict cover)
- careful policy wording, especially for tiered benefit contracts
- large margins/ reinsurer co-opertion

LTCI
- robust policy design, robust to changes in provision of care by the state
- and by regulator interpretation of benefits promised