Ch 20: Product design Flashcards
1
Q
Summary Card
A
- Product design factors
- FORCED CRAMPS accronym
- Profitability
- Marketability
- Conflicts
2
Q
List 12 factors to be considered when assessing a product design
A
FORCED CRAMPS acronym
- Financing requirements
- Onerouseness of guarantees
- Risk characteristics
- Competitiveness
- Extent of cross subsidies
- Distribution channel
- Consistency with other products
- Regulation
- Admin systems
- Marketability
- Profitability
- Senstivity of profit
- AMPLE DIRECT FACTORS from CA1/ARM?
3
Q
Meeting customer needs
A
- Savings
- Protection
- Disposal of income
- Conversion of capital into income
- Considering what stage they are in their lives
4
Q
Profitability
A
- Non-linked: premiums charged sufficient to cover benefits, expenses and provide profit margin
- Protection: mortality basis should cover risk involved, risk will gradually change and future chance should be allowed for if appropriate
- Savings: profit on investment income
- Administration: expense loadings cover marginal/admin costs incurred, allowing for cross subsidies
- Unit-linked
- Savings, protection, admin risk also relevant, but lower as
- investment risk largely borne by policyholder, and
- charges variable at company discretion
- Expense charge sufficient to cover expenses and provide profit margin
5
Q
Sensitivity of profit
A
- Mostly an issue for non-linked contracts, as under unit-linked, possible to have well-matched charging structure which reduces profit sensitivity to AvE
- Impinge on profitability
- investment return
- mortality (or other contigents, e.g. morbidity, longevity)
- expenses
- expense inflation
- persistency
- Minimise sensitivity
- investment return (if there are no investment guarantees)
- mortality (make charge for this variable, at company’s discretion)
- expenses (make charge for this variable, at company’s discretion)
- withdrawal rates (don’t offer surrender/guaranteed values)
- matching (try to match income (charges) with outgo (expenses/benefit cost) as closely as possible by duration
- Redesign non linked products
- to reduce profit sensitivity
- e.g. commission clawback to reduce sensitivity to withdrawal
*
6
Q
Marketability
A
- Innovative design (features make contract more attractive)
- Attractive benefits (understandable to market and appreciated by them)
- Attractive charging structure (for UL + consideration of guaranteed chrgs)
- Guarantees and options (premium rates or structure)
- Distribution channel
- impacts complexity of product which can be sold
- if using multiple channels, will same price be used?
7
Q
Competitiveness
A
Won’t want structure/level of charges/premium under UL/without profits non linked contract to overly depart from market norms (depending on how marketed)
- Important
- level of expense charges (and how sensitive specific distr channel is to price
- interest component
- risk component
- Overheads expense contribution
- Total profit
- With profits
- Expense and mortality profit
- Market maturity
- Market investment characteristics
8
Q
Financing requirements
A
Unless company has substantial capital resources, will want benefits/charges to be designed to minimise financing requirement. More scope for this under UL contracts
- Important for recently established
- have small amt of assets available to finance new business
- UL advantages over non-linked contracts
- no/few expense guarantees
- no/few mortality guarantees
- no/few investment return guarantees
- smaller supervisory solvency margin requirement
- Model office technique to projet financial situation
- with and without new product under sensible sales assumptions to assess company’s ability to finance the product and whether return on capital is adequate
- Reduce strain on non linked contract
- reduce initial acquisition costs
- reduce initial administration costs
- reduce valuation strain (increase val interest rate, reduce guarantees)
- financial reinsurance
9
Q
Risk characteristics
A
Consideration will need to be given to acceptibility of level of risk associated with propost contract design
- Level of risk
- that may be acceptable depends on insurer ability/willingness to absorb risk internally or reinsure
- Death contingency
- well studied and quantified risk, this easy to asborb risk, unless entering new market for that company
- Large parameter risk
- unit-linked/reviewable form contract ( to avoid long term rate guarantee)
- reinsurer large part of risk
- incorporate very ample maring in premium rate
- offer is rider rathern than shandalone
10
Q
Onerousness of guarantees
A
Company will need to consider onerouseness of any guarantees
- Problems
- suffer cost not fully expected
- reserve for loss possibility, increasing capital strain
- Guaranteed surrender value
- generousity scale will be measure by reference to asset share
- onerouseness can be quantified as their impact on product design on profitability under various scenarios
- Investment return guarantee
- for without profits non-linked business
- guaranteeing sum assured/annuity derived from premium formula bsed on yield x means that a guarnateed return of x% is guaranteed
- immunisation to reduce financial impact
- by choice of suitable investments e.g. immediate annuities => investment risk can be eliminated, with difficulties
- onerous depends on
- size (how much guaranteed)
- period of time for which it holds
- significance of reserves (for the contract)
- volume of business to which it applies
- capital available to company ( to absorb initial reserving cost/eventual real cost)
- Depends on
- how likely
- how big adverse change in variable
- financial impact of variable change (reducing financial impact of guarantees will make less onerous)
11
Q
Extent of cross subsidies
A
Company needs to decide on extent of any cross subsidies between different policies/products (e.g. large and small).
Marketing advantage of single premium/charging structure may conflict with a desire to avoid cross roads.
- Expense involvement
- Expense overrun (expenses > charges, to what extent can company fund this from interest, and to a lesser extent, profis?)
- Marginal per policy admin/sales costs
- incurred by policy regardless of its size
- setting policy charge which fairly covers cost for policies individually may prove uncompetitive
- may set lower fixer per policy charge, recouping difference over whole policy portfolio
- Fixed policy fee
- ideally even small policies should cover their own marginal aministrative costs
- might be a cross subsidy between small policies and large policies
12
Q
Administration systems
A
System requirements of new product may limit either benefits to be provided or charging structure deployed
- simplicity
- compatibility with admin system can be extended to cover simplicity
- all parties (staff, policyholders, sales people) all benefit from simple product
- complications warranted
- by some significant advantage in terms of the factorsmentioned above
13
Q
Consistency with other products
A
Company may wish to ensure charging/benefit structures of new policy are at least similar to any existing business.
- Reduce system development (saves time)
- Less training staff (administration, sales car, staff printing and marketing literature
- Unfair to existing policyholders (if new design appears more attractie, which leads dissatisfaction and possible marketing risk
14
Q
Regulatory requirements
A
Company must adhere to any regulatory requirements which should be taken into account in product design, e.g. maximum charges, treating customers fairly
- TCF
- meet normal standards of professional ethical behaviour
- reccommended by professional guidance
- regulatory requrement
- foster ongoing trust and good relations
15
Q
Reinsurance
A
