Ch 1 - 7: Life and health ins prods - Important overview Flashcards
State 3 basic aspects insurers need to consider when selling insurance products to customers (3)
Others (6)
- Customer needs
- Risks to insurer
- Capital requirements
There are various other factors too e.g.
- nature of market
- competitiveness
- requirements from providers of capital
- regulation/legislation
- distribution channels
- existing business model, etc
Comment on the considerations an insurer will make when deciding on which products to sell in terms of:
- customer needs (2)
- risks to the insurer (3)
- capital requirements (5)
- Customer needs
-
Protection
- protect customers (or their dependants)
- from consequences of unwelcom events
-
Savings
- investments, build funds for specific reason
- retirement
- repay loan
- investments, building up funds for discretionary reasons
- uses as sees fit when need arises
- Risks to insurer
- investments, build funds for specific reason
- Micro risks: higher deaths than expected=> losses
- Macro risks: insurer insolvency
- Risks varying by contract
-
Protection
- Capital requirements
- Capital recoupment
- Contract design: prefer contracts which recoup faster
- Supervisory regs
- New business strain
- Init costs + reserve + cap reqmnts> premium income
- Capital recoupment
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)
-
16 -25 of age
- likely situation
- higher education/fist job, partner or not, probably no home, probably no dependents
- needs
- support from parents, saving towards family needs, like to spend money if possible
- likely situation
-
25 - 35 of age
- likely situation
- maybe partners/children, large debts, moderate income, high expenditure, often not much wealth
- needs
- loans, risk protection, maybe saving, some retirement saving
- likely situation
-
35 - 65 of age
- likely situation
- children become independent, debts reduce, income may increase, redundancy periods may occur
- needs
- retirement savings, risk protection, wealth transfer, disposable income investment
- likely situation
-
65+ of age
- likely situation
- employment into retirement, few debts, much lower income, more accumulated wealth
- needs
- risk protection, disposable income investment
- wealth transfer
- likely situation
Briefly describe the product cycle that insurance companies work according to (8)
- Product design
- product features
- consider: customer needs, risks, distribution channels, marketing/sales, designing admin systems, pricing
- Pricing
- Administration
- maintaining policy data
- can systems cope with design complexity
- Marketing sales
- Underwriting
- impact claims experience
- at inception/claims stage
- not too onerous to disincentivise sales
- recurring claims…complexity?
- Claims management
- impact claims experience
- recurring claims…complexity?
- Experience monitoring
- info up to date: sales, prod design, claims management, assumptions (pricing/valuations)
- data: gathered, stored, facilitate analysis
- Valuation
- regulatory requirement
- policyholder liabilities, capital requirements, impact of/on reserves
Briefly describe group products in a life insurance context
Definition (1)
Situations arising in (5)
Characteristics (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 coverage on children/spouse
- employer merely facilitates
- groups linked to a club
- Characteristics
- often short term
- regularly renewable
- premium depends on
- number of individuals
- characteristics of individuals
- claims experience (experience rating)
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)
- Customer needs met
- savings, protection, accumulation
- Product features
- benefits given (claim amount, etc)
- Product forms
- conventional, with profit, unit linked, index linked
- 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
- Capital requirements
- initial expenses and new business strain
- asset share and withdrawal risk compared to asset share
- Group vs individual
- whether a group version of the contract exists or not
Define ‘new business strain’ in words (4)
New business strain in words:
- Premium paid at start of contract,
- less initial expenses including commission payments,
- isn’t enough to cover required solvency capital
- that company needs to set up at that point.
(I need to check this)
Any such strain needs to be made good from the company’s free assets
Define ‘new business strain’ as a formula
New business strain as a formula:
NBS = V0+ + E0+ - P0+
Where:
V0+ = sup reserv + solv cap at time 0+
E0+ = expenses + commission inccured time 0+
P0+ = premium paid time 0+
Define anti-selection (2)
- People being more likely to purchase insurance when they believe 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.
List and discuss 5 factors that influence the capital requirements of a life insurance product
Accronym: FISCR
Five Issues Surrounding Capital Requirements
-
Frequency of premium pmts
- more upfront = less capital intensive
-
Initial expenses
- higher initial expenses increase capital requirement if premium doesn’t increase
-
Solvency capital requirements
- need assets to cover supervisory and required solvency capital
-
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
-
Reserving basis (level of prudence)
- reserving basis stronger, requires more capital than would be required under pricing basis
Describe briefly the factors an insurer should consider when choosing the range of products to sell (4)
- Offer range of attractive products, maximising profits
- In long run, profits will be maximised when utility of products to consumers is also maximised
- Insurer should take on profitable risks within its available capital, to maximise economies of scale
- Insurer shoud diversify/control overall risks wherever possible, using appropriate volume and mix of suitably designed contracts.
Reasons why new business strain is likely to arise
• New business strain occurs when the difference between the day-one asset share, and the sum of the supervisory reserves and the required solvency capital, is negative. Any such strain has to be made good from the company’s free assets.
• For regular premium contracts the asset share is normally negative in the early years because there is a high level of expenses incurred at the start of the contract, in particular from commission, sales & marketing, underwriting and policy documentation.
• The sum of the reserves and solvency capital is likely to be positive, because these will be calculated to give a low probability that the insurer is unable to meet its liabilities. Thus liabilities exceed the assets in value and this is known as new business strain.
• The prudence implicit in the solvency calculation (reserves plus solvency capital) is usually greater than the margins for risk and profit in the premium basis. For this reason it is common to have new business strain even for single premium contracts, despite the positive net cash inflow.
