Ch 20: Product design Flashcards
List 12 factors to be considered when assessing a product design
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?
Meeting customer needs
- Savings
- Protection
- Disposal of income
- Conversion of capital into income
- Considering what stage they are in their lives
Profitability
- 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
Sensitivity of profit
- 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
*
Marketability
- Innovative design (features make contract more attractive)
- Attractive benefits (understandable to market and appreciated by them)
- Attractive charging structure (for Unit-linked + consideration of guaranteed charges)
- 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?
Competitiveness
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
Financing requirements
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
Risk characteristics
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
Onerousness of guarantees
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)
Extent of cross subsidies
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
Administration systems
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
Consistency with other products
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
Regulatory requirements
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
Reinsurance
The product design factors are not necessarily independent. Compromise will usually need to be struck.
Give examples of factors that may conflict.
Profitability
Financing requirement
Risk characteristics
Onerousness of guarantees
Sensitivity of profits
Marketability
Competitiveness
Extent of cross subsidies
