Ch 1 - 7: Life and health ins prods - Important overview

Question 1

State the factors to consider when selling insurance products to customers (3)

Other factors (6)

Answer 1

• Customer needs
• Risks to insurer
• Capital requirements

Other factors:

• nature of market
• competitiveness
• requirements from providers of capital
• regulation/legislation
• distribution channels
• existing business model

Acronym

Question 2

Comment on the considerations of these factors when deciding on which products to sell in terms of:

• customer needs (2)
• risks to the insurer (3)
• capital requirements (5)

Answer 2

• Customer needs
  
  • Protection
    
    • protect customers (dependents)from financial consequences of events
  • Savings
    
    • investments, build up funds for retirement, repay loan, other reasons
  • Risks to insurer
    
    • Micro risks: higher deaths than expected=> losses
    • Macro risks: insurer insolvency
    • Risks varying by contract
  • Capital requirements
    
    • Capital recoupment: prefer contracts which recoup faster
    • Supervisory regs
    • New business strain: Init costs + reserve + cap req> premium income

Question 3

Define new business strain, both in words and as a formula.

Answer 3

In words:

New business strain arises when premium paid at start of contract, less initial expenses including any commission payments, is not sufficient to cover supervisory reserves and required solvency capital that company needs to set up at that point.

As a formula:
NUB=V_0 + E_0- P_0
= reserve + solvency capital + expenses - premium

Question 4

What kind of customer needs might exist for customers at different age groups?

16 - 25 (4,4)

25 - 25 (5,4)

35 - 65 (4,4)

65+ (4,3)

Answer 4

• 16 -25 of age
  
  • Situation
    
    • higher education/first job, no partner, no home, no dependents
  • Needs
    
    • support from parents, saving towards family needs, like to spend money if possible (lol, what money?)
• 25 - 35 of age
  
  • Situation
    
    • partners/children, large debts, moderate income, high expenditure, often not much wealth
  • Needs
    
    • loans, risk protection, maybe saving, some retirement saving
• 35 - 65 of age
  
  • Situation
    
    • children independent, debts reduce, income may increase, wealth increase
  • Needs
    
    • retirement savings, risk protection, wealth transfer, disposable income investment
• 65+ of age
  
  • Situation
    
    • retirement, low debt, much lower income, high wealth
  • Needs
    
    • risk protection, disposable income investment, wealth transfer

Question 5

Briefly describe the product cycle that insurance companies work according to (8)

Answer 5

1. Product design
   
   • product features
   • consider: customer needs, risks, distribution channels, marketing, admin systems
2. Pricing: reflect experience and practices(u/w)
3. Administration
   
   • record and maintain policy data. changes, claims
   • can systems cope with design complexity
4. Marketing sales
   
   • Influence charact life insured. Change risk
   • Costs associated with dbn method
5. Underwriting
   
   • impact claims experience and business vol
   • at inception/claims stage
   • not too onerous or disincentivize sales. Balance both
6. Claims management
   
   • impact claims experience
7. Experience monitoring
   
   • info up to date: sales, prod design, claims man, assumptions (pricing/valuations)
   • data: gathered, stored, facilitate analysis
8. Valuation
   
   • regulatory requirement
   • policyholder liabilities, capital requirements, impact of/on reserves

Question 6

Briefly describe group products in a life insurance context

Definition (1)

Situations arising in (4)

Characteristics (3)

Answer 6

• Single policy, covering number of individuals
• Arises where
  
  • employer pays whole premium on behalf of employees
  • employer pays part/whole premium, but member must pay for dependents
  • employer merely facilitates
  • groups linked to a club
• Characteristics
  
  • often short term
  • regularly renewable
  • premiums depends on
    
    • number of individuals
    • characteristics of individuals
    • claims experience (experience rating)

Question 7

Subject F102 covers various life/health insurance products.

When describing these products, there are key broad characteristics which should be known well. What are these characteristics?

(6 broad groups, with subpoints)

Answer 7

1. Customer needs met
   
   • savings, protection, accumulation
2. Product features
   
   • benefits given (claim amount, etc)
3. Product forms
   
   • conventional, with profit, unit linked, index linked
4. Risks to insurer
   
   • Investment, expenses, mortality, morbidity, persistency, selective lapses, anti-selection, moral hazard
   • Overall risks
     
     • financial: business, liquidity, credit, market
     • non-financial: operational, external
   • Aggregation/accumulation of risk
5. Capital requirements
   
   • initial expenses and new business strain
   • asset share and withdrawal risk compared to asset share
6. Group vs individual
   
   • whether a group version of the contract exists or not

Question 8

Define anti-selection (2)

Answer 8

• People being more likely to purchase insurance when they beleive their risk is higher than insurer has allowed for in premiums/pricing.
• Also arises with options/guarantees: those most likely to gain will most likely exercise.

Question 9

List and discuss 5 factors that influence the capital requirements of a life insurance product

Answer 9

Accronym: FISCR

Five Issues Surrounding Capital Requirements

1. Frequency of premium pmts
   
   • more upfront = less capital intensive
2. Initial expenses
   
   • higher initial expenses increase capital requirement if premium doesn’t increase
3. Solvency capital requirements
   
   • need assets to cover supervisory and required solvency capital
4. Contract design
   
   • whether contract design allows reserves/solvency margin to remain low
   • lower initial reseves = lower initial capital requirement
   • slower increase in reserves over contract term, faster invested capital is release
5. Reserving basis (level of prudence)
   
   • reserving basis stronger, requires more capital than would be required under pricing basis

Question 10

Describe briefly the factors an insurer should consider when choosing the range of products to sell (4)

Answer 10

1. Offer range of attractive products, maximising profits
2. In long run, profits will be maximised when utility of products to consumers is also maximised
3. Insurer should take on profitable risks within its available capital, to maximise economies of scale
4. Insurer shoud diversify/control overall risks wherever possible, using appropriate volume and mix of suitably designed contracts.