Acronyms Flashcards
Design factors
FORCES CRAMP CURD
Fin or cap req Options and gtees Risk control or characteristics Culture Ext XS Sensitivity of profit
Consistency with other products Regs Admin systems Marketability and selling Profit
Competition/competitive
Underwriting
Reinsurance
Distribution channels
Main consumer interests?
CANES
Choice Affordability Needs met Extent of guarantees/review ability Simplicity and clarity
Restrictions regulator can place on insurer
CITRUS V
Contract type Investments T and c Rating factors (1 price, gender neutral) Uw Sales channels Volume by res req
Distribution channels
Insurance intermediary Tied agent Own sales force Direct marketing (mailshot, telesales, Internet, advertising) Worksite marketing
Reasons for tech res
MIAnAmAR
M and A
Inv strat
Liabs in IMPS accounts
Reinsurance
Principles of investment?
1) invest in A appropriate to NTC L
2) invest in A to max overall return (income and capital)
3) extent to which 1 can be departed to meet 2 depends on extent of company free assets and risk appetite
Reasons to reinsure?
Improve this Valuable SAD LIFE NIFE RST
Improve solvency position
Good value for money
Improve credit rating
Smooth results
Avoid single large losses (large depends on FA)
Diversify risk
Limit exposure to risk
Increase capacity to accept risk (NB, new territory, unusual)
Financial assistance (NB finance, free assets, m and a)
Expertise (pricing, design, uw, cm)
RST arb
Types of reinsurance
FinRe
Prop - share risk (qs, surp) share prem (original terms, risk prem re)
Non prop (risk, agg(sl), cat)
Reasons to analyse surplus?
Independent check on valuation process and data
One off components of surplus identified
Financial impact of NB
Financial significance of valuation ass not equal to experience (release of margins?)
Trends in experience identified
Reasons to do an AOEV
Big MF R MIA
Bonuses for exec remun M and A Management info Accounts public CAD, validate calcs assumptions and data used Reconcile year on year
Risk management techniques
I STOPPED RESK
Initial uw (gatekeeper and risk analysis)
Surveys on customer satis, retentions team TCF Outsource SLA Product design Process controls for ditribution Experience monitor Data checks
Reins
Enterprise risk man
Staff quality and competence assessment
Claims man
Sources of risk
RISKS I PONDER PANICS CARER
Commission clawback - appropriate commission
Rates (morb mort) (claim amount rates data) - reinsure, cm
Investment -
—liquidity – cashflow monitoring
—inv perf – clear inv strat - safe assets e.g, AAA
—mismatch – mismatch res - match NTC L
Selection - good uw
Comp - keep abreast of market dev
Inflation
Persistency - retentions, customer survey
Options and gtees - reg monitoring, reduce fixed options and gtees so more reviewable
NB vol, mix SSTN - research possible vol, mix, good uw
Data (policy and other) - check pol, claims data
Expenses and inflation - monitor experience vs pricing basis
Reins - diversify
Physical e.g. It recovery, good systems
Actions of management - senior management aware of risk policies, ERM
Non disc - good uw, train sales staff, internal
Internal audit (internal external review of fin results) systems failure (clear controls and governance) fraud (internal external audit)
Counterparties (distributors, hospitals, investments)
State benefits
Cat
Agg - diversify e.g, by region and concentration - multiple 3rd parties e,g, reinsurance
Reg, leg, tax developments - keep abreast of reg dev
Early screening and diagnosis - keep abreast of medical dev
Reputational ( appropriate commission) risk, customer service shortcoming - surveys, clear policy wording, TCF
Counterparty and distribution risk management
SSCC M DMT
Secure counterparties
SLA
Contract wording clear
Credit insurance and derivatives
Monitor performance
Due diligence
Multiple counterparties to limit exposure
Train staff
Explain EV calculation in 10 points
- PV of future sh profits from EB plus sh owned share of net assets
- NA are excess A over those required to meet L
- NA values are at MV or discounted to reflect lock in e.g, SCR
- PV future sh profit on conventional without profit is Prem + inv inc + res release - exp - claims - tax
- For UL it’s future charges + investment ret on non unit fund + release of non unit res - expenses - benefits in excess of unit res
- Full data or mp used
- Assump depends in purpose, prob BE
- Tax accounted for
- Reserves in both parts must be consistent
- Sale value is BE, buy value is prudent, appraisal value includes goodwill (value of expected NB)
Formula vs Cashflow
Formula:
- Short term
- Simple application
- Quicker to run
- Easier to check/audit/understand
Cashflow:
- Longer term
- Multistate possible
- Stochastic modelling possible e.g. Guarantee costs
- To overcome Formula Problems
Formula Problems:
- Cashflow timing not accurate
- Assumptions/returns varying over time not possible
- Negative net cashflows not possible
- Accumulation of reservers not possible
What do we want data to be ideally? (credible..etc)
Relevant Detailed Recent Credible Available Reliable Volumous Affordable In good format
Sources of data for pricing?
Own data Population Reinsurers Consultants Market (insured lives, supervisory returns) Trade magazines National statistics Overseas Modelling software companies
What might not be reflected in data other than own data?
uw cm t's and c's Distn channels Target market
What is the equation of value (formula) for the premium
=(Claims+expenses+commission+tax + etc. - Investment income)/Value of one unit of premium
=(outgo-income)/P
What would you also include in the formula? How is 50% of annual premium included for profit
Profit margin, subtract 0.5 from denominator if annual
What happens to all the formula values when modelling?
They are projected then discounted
What are typical cashflows (think about formula too)
Outgo:
Expenses (init/ren/claim) + commission + tax + claims + contribution to reserves + contribution to SCR
Income:
Premiums plus investment return on cashflows and reserves
What stages are involved in multi-state modelling?
Stages of healthy/claiming:
Healthy premium paying (pp) Sick and within deferred period (not pp) Claiming following deferred period (not pp) Recovering back to premium paying (pp) Dying (not pp)
When in a stage of multi-state modelling, what rates will be different? e.g. lapse
Lapse
Mortality
Sickness inception
Recovery
How is multi-state modelling used in practice?
- Determine proportions of lives in each stage
- Model benefit outgo as number in non-pp stage * avg sa
- Model premiums plus investment income as the premium paying stage
- In reality there is not enough data and computing power to split into all the subgroups, so groups are combined
What are the 3 types of option?
- GIO - Purchase additional cover, usually at a life event, without further health evidence, at current standard rates for that age
- Continuation - Renew long term insurance at end of original term, without further health evidence
- Reinstate mortality cover after accelerated illness plan is triggered through illness
Events that mean a GIO can be used?
Buy house Marriage Civil partnership Birth of baby Adoption Salary increase Every 3rd policy anniversary Exercise before age 55 Plan started before age 45 Issued on standard rates
Limits to extra amount a GIO can purchase of SA?
A strict maximum
A % of SA
A % of the percentage increase in salary
Maximum of the salary/loan increase
What extra things do you need to price in mortality/morbidity options?
- Needs 2 extra assumptions as part of pricing basis
a. Probability option is exercised
b. Expected mortality/morbidity of lives who choose to exercise option
Explain north american method of pricing an option?
- Needs 2 additional items in pricing basis
a. Double.triple decrement table for lives who haven’t yet exercised option, for death/disability/take up decrements
b. Mortality/morbidity tables for lives who have exercised the option, represented by rates q’x - EPV benefits - EPV premiums is the EPV cost of option
What are the disadvantages of the north american option technique? and the conventional method?
NA.
Difficult to get enough data for the decrement rates
NB has no direct experience
Conv.
- Can’t use when many possible exercise dates
- Or when there is a choice of which option to take
a. For 2. the approach would be to assume the worst option financial for company is taken up
Explain the conventional method
We make the following assumptions:
- All lives that can take up the option will do
- The mortality/morb experience of those lives who take it up is the ultimate rates (worse) corresponding to the select rates (good mort) if underwriting had been completed as normal at exercise date
- The mortality/morbidity basis does not change over time so only 2 sets of tables are needed
What is the other way of valuing an option?
Stochastic modelling
Apart from data and costing options/guarantees in pricing what else will you need to think about?
Anti-selection
Regular monitoring:
Regularly monitor NB basis
Regularly monitor reviewable premiums
Regularly review reserves
Premiums and profits:
Premium competitive vs. market
Premium right for enough volume
Are profit margins right or do they need reducing for market share
Is the Overall return on capital right?
Regulations and reinsurance:
Regulatory restrictions on pricing e.g. prescribed basis
Regulatory restriction on investments e.g. local assets must be invested in
Reinsurance impact on pricing/development/profit
Reinsurer’s requirements
How can reinsurance help in pricing?
SADLIFENIFERST
What are the 3 important things in state healthcare provision?
Objectives
Methods
Funding
What are the 4 main objectives of providing state healthcare?
Protect nation’s health
- healthy nation means more productive and higher GDP
Subsidise the poor
- Allow access to doctors/medicine/hospitals
Balance the budget
- funded through general tax or specific health charges
Follow social culture and/or political promises
- State healthcare may be part of nations culture and difficult to change in short term
4 possible ways state healthcare and insurance can co-exist
Insurance as an optional/compulsory alternative
Insurance as an optional/compulsory compliment
Alternative means comprehensive state healthcare, but you might want better service, or not be allowed if salary above £x
Complement means limited state healthcare and individual can/must fund rest.
What are the methods the state will use to provide healthcare?
- Provide own hospitals etc.
- Use commercial hospitals and reimburse partly/fully
- Cash lump sum for old-age people to change home etc.
- Income for those out of work/old
How will state benefits be related to earnings? Why would they be each type?
- Salary-related, reward for higher tax payers
- Flat-rated to provide incentive to return to work, minimise cost, encourage self-provision to those who can afford it.
What are the incentives a government can offer to those doing self-provision for healthcare?
- tax relief on premiums
- Exclude some/all of population from some national welfare
- reduce general tax
- direct subsidy to providers to reduce prices
How can the state fund healthcare?
PAYG
Estimate outgo, tax revenue and subsidy needed over next year and adjust tax
Forward funding
Establish all of this over next 5, 20 year etc.
Create a fund just for healthcare
Intermediate methods
A mixture of immediate and modelled, used when reducing workforce vs. beneficiaries.
Regulatory restrictions for pricing
- Prescribed basis
- Must send in basis
- Invest in ‘local’ assets
- Collect premium tax
Reg restrictions for design and stakeholders
Regulator desires:
- Insurer remains solvent
- Customer detriment minimal (sales/admin/cm)
- Insurer files accurate reports
To minimise customer detriment:
- Clear unambiguous wording
- Prescribed basis
- Send in calcs before marketing
- Represent value for money
- No undue pressure e.g. have cooling-off periods
- Product sold to customers it’s designed for
Regulatory restrictions on investments
- type
- maximum amount used for solvency
- proportion held in particular type
- single counterparty/country exposure limit
- custodianship fo assets
- currency matching
- extent of mismatching allowed
- mismatch reserve
Regulations in risk management
TCF impacts on.. 1. Sales process through literature 2. claims process 3. customer relationship management
Company must:
- avoid promising more than scope of product
- make all policy condition clear and unambiguous
- monitor sales process
how are Regulatory developments a source of risk
Changes may effect EB
e.g. not using gender, not allowed exclusions
Court cases may set a precedent for compensation
Regulatory restrictions in the general business environment?
1, type of contract
- premium rates/charges
- ratings factors
- t’s and c’s like clear method of pup value calc
- sales channels/commission/procedures
- u/w restrictions like gender
- reserve requirements being an indirect limiter to NB volume
- Investment retrictions
What are the 4 things to write down for each distribution channel?
- Who they work for
- How remunerated
- Complexity of product
- Initiator
Describe the distribution channels
Insurance intermediary
- Who they work for - fully independent of market (though may be owned by an insurer), sell products from whole range
- How remunerated - commission from insurer or fee from policyholder
- Complexity of product - professional, most complex
- Initiator - customer is, though periodic reviews mean more sales
Tied agent
- Who they work for - other financial institution like bank, selling limited range, tied to one or several insurers
- How remunerated - commission from insurer
- Complexity of product - simpler
- Initiator - typically customer but agent may be active in selling too
Own sales force
- Who they work for - insurer directly
- How remunerated - commission/salary/mix
- Complexity of product - not very complex
- Initiator - the agent, through sales/client lists, hope to build rapport
Direct marketing
- Who they work for - mailshot/press/telesales/internet/social media
- How remunerated - n/a
- Complexity of product - very simple
- Initiator - press or tele = mixture - mailshots = insurer
Worksite marketing
1. Who they work for - representative of insurer obtains permission from emplyer to address/sell to group of employees
2. How remunerated - commission/salary
3. Complexity of product - simple, though depends on sophistication of audience
4. Initiator - agent
Currently used in PMI, could be for CI/IP, not for LTCI
Types of commission?
Indemnity - for premiums not yet paid Renewal - encourage persistency Initial (between indemnity and level) Level (a percentage of each premium paid) % of SA
Types of tax, what do they influence/constrain
- On premiums
- On annual profits (change in A - change in L)
- Investment income gains/loss - some/all operating expenses
They influence design (tax efficiency) but also constrain it
Give 9 ways that the general business/economic environment can affect sales/design etc. Give line on each
- Regulatory regime restrictions (CITRUSV, can non-insurers sell, what are their restrictions like?)
- Tax regime (which products are tax efficient)
- Commission (distributors want to sell high commission)
- Changes in need to buy/sell (different governments rules)
- Professional guidance (guidance on government regs)
- Inflation (reviewable/expenses)
- Business cycle (employer demand vs employee demand)
- Employment security (IP)
- Political stability (which government likes NHS?)
What 4 things ensure accurate and complete policy/claims data?
Accurate recording Regular vetting and Spot checks Data acceptance controls Compulsory fields Staff training
Give 2 points on accurately recording data?
- Part of the internal/external audit team will be to consider if data is reliable
- Format of proposal form and admin system input screen the same
Give 2 points on regular vetting and spot checking data?
- Records should be check end to end through different systems
- Should periodically compare paper records vs. facts stored.
Give 2 points on data acceptance controls?
- Software should have automatic error checking and prevention of input e.g. if age > 120
- Where exceptions occur, only staff of certain level can change it, and an audit trail must be kept
Give 2 points on compulsory fields in data checking
Input not accepted unless these are filled
e.g. Age, sex, policy number to cross check against claim
Give 2 points on staff training for data checking
- Close relationships with input staff and software staff should be built
- Encourage input staff feedback
8 principles of assumptions?
RAF FsCUNT
Relevant - the data should be relevant to risks
Accurate - parameters derived as accurately as possible
Flexible - flexible basis for valn/reserving to reflect changes in risk
Financially significant - take particular care over FS assumps
Consistency between various assumps..(client)
Needs of client, considered
Tax/regs/legs accounted for
What assumptions might I forget?
Benefit outgo and inflation Transfer and recovery rates SCR Market consistency Risk discount rate Profit criterion Margins
Where will you need to monitor experience? Or what will you do with the results?
Before sale:
Design Sales literature Commission T's and C's Marketing Pricing
During sale:
Underwriting
Data and admin systems
During policy in force:
Reserving
Capital allocation
Staff headcount
Staff training
During claim:
Claims management
