1
Q
Major Types of Life Insurance
A
Death Oriented:
1. Assurances
2. Endowments
3. Annuities
Health Oriented:
1. Income Protection
2. Critical Illness
3. Long Term Care Insurance
2
Q
Elements of Product Structure
A
PROGNs
- Profit sharing
(without-profits, with-profits, unit-linked, index-linked) - premium Regularity
(singular vs regular) - Options and Guarantees
- Number insured
(single, joint, group) - Surrender
3
Q
Product Cycle
A
- Product design
(product features: customer needs, risks, channels, admin systems, marketing/sales,pricing) - Pricing
- Marketing and Sales
- Underwriting
(onerousness on sales vs impact on claims)
-Administration
- Experience Monitoring
(assumptions vs reality on: claims, off rates, sales) - Valuation
(regulatory requirements, policyholder liabilities, capital requirements) - Claims management
(esp. recurring/ongoing claims)
4
Q
Factors Affecting Capital Requirements
A
DARE
- Contract Design
(PROGNs + implications on the release of reserves) - Additional solvency requirements*
- Relationship between pricing and supervisory reserving bases*
- level of initial Expenses*
(*New business strain refresh:
Initial costs
+Reserves
+Capital requirements
>
Initial premium income)
5
Q
Elements to Describing a Product
A
NICS
- Need
(Savings/Protection/Mix + Product benefit + Example + Insured Risks) - Insurer risks
(good to complement with view of p/holder risks) - Capital requirements
(Design + Regulation
… DARE) - product Structure
(PROGNs)
6
Q
Examples of Group Product Structure
A
- Employer pays premium
- Employer shares premium cost
- Employer just facilitates deduction
- Non-Employer Groups
(clubs and cards)
7
Q
Endowment Assurance
A
- Need:
> Savings AND Protection
> Pays on Death or Maturity
> Examples:
Transfer of wealth,
Repayment of interest-only debt,
Retirement - Insurer Risks:
> Investment returns
(extent will depend on profit structure)
> Mortality
(depends on size of death benefit…
High Death Ben => High mort risk at beginning
No Death Ben => Greater risk of longevity
…element of anti-selection risk)
> Withdrawals
(esp. when negative asset share)
> Expenses
(inflation, inability to control expenses, sales volume issues for fixed expenses) - Capital Requirements
(May be significant: DARE) - Possible Structure
(PROGNs)
> Surrender + Paid up option often available
> Group version exists
(retirement benefits, death-in-service benefit)
> Most common profit structure:
Unit-linked or with-profits
8
Q
Whole Life Assurance
A
- Need:
>Protection
>Pays on death whenever it occurs
>Examples:
Death expenses (funeral, inheritance tax, death duties), Wealth Transfer (tax advantages) - Insurer risks
> Mortality risks
(depends on age at entry and duration in force
…incl. anti-selection + selective withdrawals)
> Investment risks
(depends on contract design and age at entry/duration in force)
> Withdrawals
(withdrawal value vs asset share,
or negative asset share)
> Expense inflation
(inflation exposure great because of long duration of administration of policy) - Capital requirements
(May be significant: DARE) - Possible structure
(PROGNs)
> Surrender value common
> Common to increase with increasing duration
> Paid up option common
> No group version
> Most common profit structure:
Unit linked or without profits
9
Q
Term Assurance
A
- Need:
> Protection
> Pays out on death within term chosen at outset
> Examples
Cheaper protection for dependents, Paying off debt, Employer life cover, Credit cards, Key person - Insurer Risks
> Mortality risk
(= MAIN RISK
…incl anti-selection + withdrawal)
> Expense risk
> Withdrawal risk
> Risk of lapse and re-entry - Capital Requirements
>depends on surpervisory reserving and solvency margin requirements
>reserves typically small, but solvency margin may be large
>options/guarantees will influence this
> DARE - Possible structure
(PROGNs)
> Decreasing version common (debt or dependents having reduced dependency over time)
> Group version common
(employer death benefit; credit card books)
> Options to renew/convert
(nice to have cheap form with certainty of the option to extend/renew)
> Group option to continue after employment
> Unlikely to be any surrender benefit/paid-up version
> Most common profit structure:
Conventional without profits
10
Q
Immediate Annuity
A
- Need
> Protection AND Savings
> Payment of regular income benefit payments for life or set period, immediately following purchase with single premium
>Fulfills need of converting capital into lifetime income
> Examples
Retirement income, Payment of school fees - Insurer risks
>Longevity risks
(= Main risk - may be affected by self-selection, improvement of life expectancy)
> Investment risk
(depends on extent of matching + asset availability)
> Expense risk
(Inflation, expense management) - Capital Requirements
> Potentially some strain through regulatory requirements for reserves/solvency margin
(Long-term liability might be demanding on capital)
> Single premium at outset counters strain impact of expenses and reserves - Possible structure
> PROGNs
> May be level or variable
> Different profit forms
> May be guaranteed period
> Single, joint, last survivor
> Usually no surrender
> Group version can exist for pensions
> in advance or arrears
> Most common profit structure:
Conventional without profits or index-linked
11
Q
Deferred Annuity
A
- Need
> Annuity with income starting at future (“vesting”) date.
> Can be purchased with single premium or regular premiums up until vesting date
> May be structured as endowment + immediate annuity
> Example: Income in retirement - Insurer Risks
> Same as endowment assurance up to vesting date
> Same as immediate annuity after vesting date
> Additional risks if guaranteed terms for conversion - Capital requirements
> Broadly similar to endowment assurances
> Guaranteed terms will require additional capital - Structure
> Lump sum alternative option
> Group form possible (retirement groups)
> Typically surrender value only available during deferred period
> Same structure options available as for immediate annuity
12
Q
Unit-Linked
A
Def:
Premiums pooled into a collective investment fund. Benefit will depend on the investment performance of this fund.
(Benefit can be value of units, % of units, guaranteed fixed amount)
- Customer Needs/Risks
> Risk and reward predominantly borne by policyholder
(short term “Bad Day” volatility risk
+ long term poor performance risk)
> Some inflation protection
> Better flexibility
(cover choices and contribution variation)
> Often subject to less underwriting
> Extent of protection vs savings (and the risks therein) will depend on the benefit structure and size of any guarantees
> Greater cost efficiency
(higher benefit for given premium expected)
> Risk of insufficient cover
(for guaranteed death benefit - likely to be in monetary terms)
> More underwriting if increased guarantee - Insurer Risks
> Overall reduced mortality/expense/investment risk
(due to reduced guarantees)
> Marketing risk
(increased uncertainty to insured)
> Anti-selection + Selective withdrawal risks
(some control through surrender penalties)
> Investment risk on non-unit related guarantees
> Expense risk if charges not reviewable or legislative constraints on charges
> Mortality risk if guarantees given or selective effects - Capital Requirements
> Dependent on structure:
Low allocation of premiums at start (higher charges)
= More capital efficient
> May be able to account for future charges if regulation permits - Structure
> Reviewability of charges influences risk levels
> Lower profit margins = cheap for customer, but still contributes to profit through volumes
> Surrender value common with surrender penalty built in
13
Q
Index-linked
A
Def:
Benefit is linked to movements of an underlying investment/economic index’s movements
- Customer Needs/Risks
> Protection against erosion relative to index
(index guarantee)
> Risk of poor returns (short term volatility +long term performance)
> Less flexible
> Increased risk of insurer insolvency (guarantees and reduced reviewability mean strain on insurer) - Insurer Risks
> Higher investment risk to insurer
(perfect matching often not attainable/affordable
– mismatching exposes insurer to more risk) - Capital requirements
> Nothing specified, but I assume similar to without profits, potentially with mismatching reserve requirements - Structure
> Reduced scope for reviewing charges
> If surrender value applicable, normally speaks to value of benefits calculated according to index value at point of surrender
14
Q
Without Profits
A
Def:
Benefit is guaranteed sum assured
- Customer Needs/Risks
> Benefit may turn out to be insufficient
> Insurer insolvency
> Inflexibility of product
(harder to maintain during financial/health/redundancy duress + can’t change benefit needed easily)
> Higher guarantees imply higher cost - Insurer Risks
> Guaranteed benefit to be met - Capital requirements
> Standard - Structure
> Reduced scope for reviewing charges
15
Q
With Profits
A
Def:
Benefits increase over time with bonuses declared by insurer. Policyholder shares in part/all of future surplus.
- Customer Needs/Risks:
> Cost, flexibility and guarantee levels will sit between WoP and unit-linked
> Some inflation protection
(dependent on nature of profit distribution)
> Risk of insurer insolvency
(less than WoP since undistributed surpluses can maintain solvency)
> Still quite inflexible (cost + benefit) - Insurer Risk
> Some (though reduced relative to without profits) risk of insurer insolvency - Capital requirements
> Standard (potentially reduced relative to w/o profits because of discretion of bonuses) - Structure
> Different bonus distribution structures
16
Q
Income Protection
A
- Need:
> Regular stream of payments made during periods of incapacity
> Meets policyholder’s need for lost income during periods of incapacity
> Pays income until insured recovers, dies or the term ends
> Complement State and Welfare contributions + Short term benefits paid by employer
> Examples
Full replacement of income, Earmarked expenses for period (e.g. loan servicing),
Rider structure to meet premiums on other policies, Locum Protection Insurance
> Exclusions:
-Unemployment
-Redundancy
-Early retirement
-Reluctance to return to work
>Certain illnesses/injuries (like attempted suicide or HIV) - Insurer risk
> Claim inception and termination rates
(incl. anti-selection + selective withdrawals)
> Moral hazard
> Mortality, expenses and investment risks
(less than other products) - Capital Requirements
> Relatively low capital requirements (chance that no claim will be paid at all)
> Argument for higher margins due to additional uncertainty on morbidity product
> DARE - Structure:
> Incapacity can be LT or ST
> Income coverage subject to limits (caps on amount; escalation can’t outpace earnings inflation)
…Replacement ratio - post-claim income vs pre-claim income (net of tax)
> Proportional/rehabilitation benefit to incentivise return to work
> Generally no surrender value
> May be commutable (provide lump sum), though generally not the case
> Linked claim period
> Increase options
(without further underwriting - life-event link)
> Group IP common
> Mostly without profits
(profit structures only for peripheral savings structure with morbidity charge) - Complexities:
> Issues around underwriting (due to past medical history or occupation)
> Definition of incapacity not always objective assessment
> Escalation rates can be different in and out of claim
17
Q
Definition of Incapacity
A
- Occupational Definition
> Inability to perform own occupation
> Inability to perform own or similar occupation
> Inability to perform any occupation
> Combo: Inability to perform own for initial and then similar/any thereafter - Functional Assessment Tests
- Activities of Daily Living
- Activities of Daily Working
- Personal Capability Assessment
(need to balance between meeting needs and controlling insurance risk)
18
Q
Alternative Names for IP
A
- Permanent Health Insurance (PHI)
- Disability Income Insurance (in USA)
- Long-term sickness insurance
19
Q
Periods in IP Contract
A
- Waiting period
(after commencement) - Deferred period
(after incidence)
-Early notification period
(within deferred period)
- Linked-claims period
(between consecutive claims) - Expiry term/age
(period at which benefits cease)
20
Q
Purpose of Deferred Period
A
CAIN
- reduce cost of Claims to insurer, and thus price
- Reduce insurer’s Admin cost, and thus price
- Integration with employer/state-supplied benefits for short-term sickness
- meet true customer Need
(reduce number of trivial claims)
21
Q
Milestone criteria for “Guaranteed Insurability Option” (GIO)
A
- Qualifying life-event must act like limited form of underwriting
(evidence of lower-than-average morbidity risk) - Financial underwriting as secondary consideration
(no incentive to over-insure)
22
Q
Methods of preventing over-insurance (IP)
A
MR QT
- Max benefit formula at point of sale
- Regular benefit reviews
- Quality training of sales staff
- clear policy conditions (Ts and Cs) of likely action at claim
23
Q
Customer Needs in Product
A
MACA
- Meeting financial needs
(protection/savings) - Affordability
- Clear products
(purpose + conditions understood) - Appropriate guarantees and options
24
Q
Critical Illness
A
- Need
> Protection product
> Sum assured payable on incidence of listed condition or treatment
> No explicit link to loss, but amount can be used in flexible way and is readily understood by the market
(non-indemnity)
> Triggered by critical illness event or medical procedure
(Core, Additional, Terminal Illnesses, TPD, children)
> Examples:
Income replacement,
Repayment for mortgage/debt,
Medical costs,
Buyouts of partner’s stake,
Lifestyle change financing,
Recuperation after illness,
Tax planning,
Specialist equipment - Insurer risks
> Incidence/diagnosis rates
(incl. anti-selection and selective withdrawals)
> Withdrawal risk
(when negative asset share)
> Expense risk (more on standalone contracts)
> Very limited investment risk
> Uncertainty around…
…medical advances
… data scarcity
> Dispute/Marketing risk, if poor understanding around triggers - Capital requirements
> Typically low
> Similar to IP because similar expenses, commission and supervisory requirements
> Reserve for late notification of claim - Structure
> Forms:
Standalone, Rider, Accelerated
> Survival period likely for stand-alone
> Child rider option
> Tiered benefit structure option
> Renewal option
> Terminal illness often included as catch-all
> Usually no surrender benefit
> Group version may exist
> Guaranteed insurability, new diseases,
+ premium/benefit levels
25
Requirements for Critical Illness
1. Must be perceived by public as serious and to occur frequently
2. Clear definition with no ambiguity
3. Sufficient data to price benefit
4. Ability to avoid anti-selection
26
Pros and Cons of Tiered CI
Pros:
1. Closer fit to medical distress and financial needs
> Reduce incentive for symptom exaggeration or anti-selection
> May be deemed more comprehensive/fair
2. Multiple claims possible
> Better client experience
> More marketable
Cons:
1. More complex
> Harder to compare
2. Potential for higher degree of claim dispute
3. Weak definition can result in higher claim level than expected
27
Product Definition of Total Permanent Disability
(Generically, disability with no hope of recovery)
3 Classes:
1. Occupation-based
2. Activities of Daily Living
(most generic)
3. Definition using working activities or functional abilities
28
Alternative names for Critical Illness
- Dread disease insurance
- Serious illness insurance
- Crisis cash
- Living assurance
- Critical illness cover
29
Long Term Care Insurance
1. Need
> Protection product
> Continuing personal/nursing care and associated domestic services for those unable to look after themselves without some degree of support
> Costs covered:
++Living (food, amenities)
++Housing
++Personal care
> Trigger generally = ADLs + overriding mental impairment
> Commonly needed by the elderly
> Treat (not fix) consequences of condition
(improve comfort)
>Goals
...Assist to regain independence
...Slow rate of deterioration
...Maintain well-being
> Protection against inflationary costs if indemnity
> Advice on care
> Enables insured not to be dependent on others
2. Insurer risks
> Claim inception and transfer probabilities
(including anti-selection and selective withdrawals)
> Investment and Expense risks
> Normal withdrawals
> Marketing risks
> Uncertainty due to data scarcity (novel and low demand)
3. Capital requirements
> Could be extensive
> Comparable with endowment assurance (and other types of investment contracts)
> Dependent on PROGNs
> NB:
1. Nature of contract (unit/cash/indemnity)
2. Guarantees
4. Structure
> Pre-Funded (healthy + contingent) vs Immediate Needs (claiming for uncertain survival duration)
> Indemnity, Indemnity subject to max cash, and Fixed cash benefits
>Standalone vs Rider options
> Generally no group version
> No surrender option
> Paid up option on pre-funded
> Premature death benefit on pre-funded
> Pension augmentation
> Commutable option (lump sum) on pre-funded
> Benefit my increase over time to reflect worsening health
> Unit-linked version may exist (useful for death)
30
Channels of LTC
1. Domestic support
2. Live-in care
(in-home care)
3. Residential care
(community care)
4. Medical care
(intervention and supervision on physical/mental breakdown)
*Can be formal or informal contexts
31
Pros of Cash vs Indemnity
*INSURER*
Cash:
> Known benefit
> Easier to price and reserve for
(more certainty --> smaller margins)
Indemnity:
> May be able to get benefits at cheaper rate with providers directly than cash benefit cost
> Fewer windfall payments
(don't have to be as stringent on claim assessment)
*INSURED*
Cash:
>Flexibility of use
Indemnity:
> Guarantee that needs will be met (inflation and cost change protection)
> No scope for abuse by family
> Expertise and packaging of provision included
32
Fund Protection Levels of Unit Trust
- Protect entire investment fund
- Protect initial investment
- Allowing full fund to be exhausted
33
Three Periods in Unit Trust LTCI
1. Deferred period
2. Period during which LTC benefits paid from unit fund
3. Period during which LTC benefits paid from non-unit fund (until death or recovery)
34
Life stage Considerations
- Career maturity
(income)
- Dependants and partners
- Expenses and Debt
- Health
35
Characteristics of Group Products
- Often short term
- Regularly renewable
- Premiums depend on:
1. number of individuals
2. characteristics of individuals
3. claims experience (experience rating)
4. amount exposure
- Concentration risk
- Reduced Anti-selection risk
(compulsory membership requirement,
'free' membership encouraging greater participation,
salary related cover limits)
36
Types of Insurer Risks
*Micro*
-Investment
-Expenses
-Mortality
-Morbidity
-Persistency
-Lapses
-Anti-selection
-Moral hazard
*Macro*
-Business (F)
-Liquidity (F)
-Operational (NF)
-Credit (F)
-Market (F)
-External (NF)
37
New Business Strain
(Desc + Formula)
Initial premium not sufficient to cover required solvency capital, reserving requirements and initial expenses (including commission)
NBS = (V0+) + (E0+) - (P0+)
V0+ = sup reserv + solv cap at time 0+
E0+ = expenses + commission incurred time 0+
P0+ = premium paid time 0+
38
Goals of Insurer
-Maximising profitability for given level of risk
-Maximising utility of consumers from range of products
(part of maximising profit)
- Maximise return on capital
-Taking advantage of...
**Economies of scale
**Profitable risks
**Diversification of risks
...within context of capital available
39
Charges + Expenses on Unit Linked
Deduction Methods:
> From premium before invested
1. Allocation rate
2. Bid-offer spread
3. Fixed amount per premium
> From unit funds:
1. Management charge
2. Fixed regular charge
3. Death Benefit charge
Initial Expenses Charging:
1. Very low (/zero) initial allocation at start
2. Reduced allocation rate for significant part of the policy
3. Higher regular fund management charge
...Capital units (attract higher charge) vs accumulation units
40
Benefits of Group IP
1. promote employee health + speedy return to work
2. sometimes legal obligation
3. tax advantages
4. cheaper (economies of scale)
5. smooth into early retirement when poor health at end of work
6. cover employer's statutory sick pay
41
Benefit of Industry-wide definitions for CI
- Greater collective experience = more information
- Shared expertise
(on current medical conditions + future advances)
- Shared costs
- Lower risk loadings with more certainty and lower costs
- Easier for prospective policyholder to understand
- Reduced ambiguity
++Easier for staff to explain >> More sales
- Claims settled more quickly with fewer disputes
++ Reduced reputational risk
++ Reduced expenses
F102 - Life (Skeleton)_MM
flashcards
Decks in class (22)
# Cards
-
CH 1 - 7 (Products)41
-
CH 8 (Asset Shares)6
-
CH 9 - 10 (Profit Distribution)20
-
CH 11 (Distribution Channels)7
-
CH 12 (General Business Environment)13
-
CH 13 - 15 (Risks)15
-
CH 16 (Pricing Units)10
-
CH 17 (Actuarial Funding)9
-
CH 18 - 19 (Models)14
-
CH 20 (Product Design)2
-
CH 21 - 22 (Setting Assumptions)18
-
CH 23 - 24 (Supervisory Reserves and Capital Requirements)16
-
CH 25 - 26 (Surrenders and Alterations)15
-
CH 27 (Cost of Guarantees and Options)8
-
CH 28 (Pricing Health and Care Contracts)4
-
CH 29 - 30 (Reinsurance)15
-
CH 31 (Underwriting)10
-
CH 32 (Policy Data Checks)2
-
CH 33 (Investment)9
-
CH 34 (Further Risk Management)6
-
CH 35 (Monitoring Experience)13
-
Definitions12
