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MAY 2024 > Ch 23: Contract design > Flashcards

Ch 23: Contract design Flashcards

1
Q

List the 7 key parties involved in contract design

A

Actuaries
* Initial pricing
* Determine reserves and design process

Lawyers
* Draft contract ensure no extra benefits provided

Providers of benefits
* Want contract that meet their needs in cost effective way
* Providers needs influenced by: Market,capital,liquidity,expertise

Accountants
* Ensure income.outgo accounted for correctly

Customers
* Customers needs influenced by: premiums,risks covered,risk appetite

Administrators
* Ensure contract is administered

Shareholders / financial backers
* want reports on how finance is being used

ALPACAS

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2
Q

List 18 factors to consider when designing or redesigning a contract

A 
Administration systems
Marketability
Profitability
Level and form of benefits
Early leavers benefits
Discretionary benefits
Interests and needs of customers
Risk appetite of the parties involved
Expenses vs charges
Competition
Terms and conditions of the contract
Financing (capital requirements)
Accounting implications
Consistency with other products
Timing of contributions or premiums
Options and guarantees
Regulatory requirements
Subsidies (cross-)

AMPLE DIRECT FACTORS

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3
Q

List the factors influencing the needs of the provider

3

A
  1. The chosen market
  2. The capital available
  3. The expertise available
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4
Q

List the factors influencing the needs of the customer

4

A
  1. The capacity to pay
  2. The risks they need to be covered
  3. The benefits that are needed at different times in the future
  4. Attitude to financial risk
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5
Q

Give examples of how a contract can be designed to cater for different risk appetites amongst customers

2

A
  1. Different investment funds , e.g. low, medium and high risk
  2. Different levels of cover, e.g. comprehensive vs third party
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6
Q

Give examples of how the regulatory environment may influence the design of a product

4

A
  • Products must meet regulatory requirements.
  • Products can be designed to benefit from favorable financial or taxation regimes.
  • Products should be designed to ensure that initial expense can be recouped if a policy is cancelled within any regulatory ‘cooling-off’ period. Otherwise make loss on initial expenses
  • Regulation may require information to be disclosed to potential customers, for example discontinuance terms.

TCF:
* Ensure fair treatment of customers across the entire product life cycle
* Design,pricing,promotion,advice and servicing.claims processing,complaints management

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7
Q

Give the variables that influence profitability of a contract

5

A
  1. Claims experience: Mort. morb, freq,severity
  2. Expenses and inflation
  3. Investment returns
  4. Withdrawal experience
  5. NUB sale volumes and mix
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8
Q

Give examples of contract design features that make a contract more marketable

4,3

A
  1. Guarantees, options and choices
  2. A competitive (low) price
  3. Transparency and simple to understand
  4. Features that distinguish it from the competitors
  • Target market changes design
  • lower income: simple features reduce cost and incr understanding
  • higher income: more coomplex products that change with circumstances.
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9
Q

Give the competitive factors that need to be considered in contract design

2

A
  • Price
    Lowest price price = higher volumes, so design to cover basic needs to keep costs down as easily comparable
  • Product features
    Compared on features available. Can recieve selective business/ innovate with unseen features
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10
Q

State the Level and form of benefits offered

3

A
  • Amount covered
  • Regular payment/ One-off benefit
  • Vary with customer needs and cost of contributions
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11
Q

Options and Guarantees

2

A
  • Options
    One party has choice and other sets terms
    eg WOP option: stop premiums and change level of benefits
    eg change level of premiums and renewal options
  • Guarantees
    eg Basic sum assured is guaranteed to increase with inflation. Minimum maturity values
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12
Q

List examples of guarantees that might be offered as part of a contract design

6

A
  1. Guaranteed benefits
  2. Guaranteed minimum maturity value
  3. Guaranteed minimum growth rate
  4. Guaranteed annuity rates
  5. Guaranteed premiums
  6. Guaranteed charges
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13
Q

Discretionary benefits

3

A
  • Surplus is shared with policyholders
  • Can be through:
    With profits
    No claim discounts/bonuses
    Reduction in premiums
  • Main consideration is PH resonable expectations
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14
Q

Discontinuance benefits

1,4

A
  • Benefit provided on voluntarily stopping premiums

Can be provided on:
* Surrender: The policy stops, there is no further cover and the policyholder receives a lump sum payment SV

  • Lapse: The policy stops, there is no further cover and usually no payment is made to the policyholder
  • Paid-up: The policyholder ceases to pay premiums but the policy continues to offer the policyholder some cover. Benefit reduced to paid up value
  • Withdrawal:This normally encompasses surrender and lapse, as the policy does not stay in force.
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15
Q

Factors to consider when determining discontinuance terms

6

A

Fairness, hence the starting point will be the ‘asset share’ of the contract (a current value determined retrospectively from the accumulation of net cashflows)

Other factors include:

  • PRE
  • New business disclosure and any subsequent communications
  • competition
  • regulation / legislation affecting discontinuance terms
  • administration expenses of determining and implementing the terms
  • ease of calculation and frequency of change of terms
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16
Q

Main factors to consider in determining suitable discontinuance terms for an individual leaving a benefit scheme

6

A
  1. Fairness between the leaving member and those staying
  2. Whether the member want to stay in the scheme as a deferred member or take a transfer value to another scheme
  3. The scheme’s funding level at the point of discontinuance
  4. Regulation / legislation affecting discontinuance terms
  5. Administration expenses of determining and implementing the terms
  6. Ease of calculation and frequency of change if terms
17
Q

Define ‘new business strain’

3

A
  • New business strain is the shortfall that occurs when a contract is written.
  • It occurs when the initial expenses, the provisions and any solvency capital exceed the premium received.
  • New business strain results in a initial capital requirement (to finance the shortfall)
18
Q

List ways in which a contract could be designed in order to reduce new business strain

5

A
  1. Avoid options and guarantees
  2. Match charges with expenses, and keep charges variable.
  3. Low initial expenses / commission
  4. Offer contracts with low statutory provisioning requirements.
  5. Use single premiums rather than regular premiums
19
Q

List four methods of financing benefits

4

A
  1. Pay as you go
  2. Funding all the benefits in advance (single premium)
  3. Regular payments building up a fund
  4. Paying an amount when the benefit even happens, for example purchasing an annuity at the point of retirement
20
Q

Outline the main administrative considerations that relate to contract design

5

A

These include:
1. whether to outsource the administration or perform it in-house

  1. whether existing systems can carry out the functions that have been built into the product design
  2. the need to produce a new or updated product literature
  3. the cost of making systems and admin process changes
  4. whether some of the changes can be deferred because they are not required at short policy durations - whilst bearing in mind the potential difficulty of scheduling these changes for a later time
21
Q

List 8 items that the expense charges of an insurance company would be expected to cover

A

COST RAID

Commission
Overheads
Sales / advertising
Terminal, e.g. paying benefits

Renewal administration ,e.g. collecting premiums
Asset management
Initial administration
Design of the contract

22
Q

Explain the significance of cross-subsidies within a class of business in relation to contract design

3

A
  • Cross-subsidies occur when certain policies contribute more to profit and overheads than other policies.
  • Where there are cross subsidies, the mix of business written becomes important!
  • If the actual mix is different to the expected mix, then profits may be higher / lower than expected
23
Q

Give examples of conflicts between contract design factors

A
  1. Profitability vs competitiveness
  2. Avoiding cross-subsidies vs simplicity of administration
  3. Offering options and guarantees vs minimizing risk
  4. Offering options and guarantees vs financing requirements
  5. Offering options and guarantees vs simplicity of administration
  6. Marketability vs strict terms and conditions
24
Q

Stakeholders involved in contract design:

- Actuaries

A

Actuarial will be involved in

  • the INITIAL COSTING of the financial structures
  • the subsequent determination of the PROVISIONS that will need to be held to meet future liabilities.
  • the DESIGN through assessing the impact of both the cost and reserving implications on modifications to the benefit design.
25
Q

Stakeholders involved in contract design:

- Lawyers

A

Involved in DRAFTING THE CONTRACTS supporting the financial structures

to ensure that the provider is not exposed to the risk of
…. providing more benefits
…. or entering into greater risks
than intended.

26
Q

Stakeholders involved in contract design:

- Accountants

A

involved in ensuring that the provider of the financial structures PROPERLY ACCOUNTS for their income and outgo.

27
Q

Stakeholders involved in contract design:

- Financial backers

A

Financial backers will want REGULAR REPORTS demonstrating proper stewardship of the finance provided.

28
Q

Stakeholders involved in contract design:

- Administrators

A

Need to ADMINISTER the financial structures.

The more complex the financial structures, the greater the cost of administration will be.

29
Q

Regulation can affect (5)

A
  • CAPITAL REQUIREMENTS of a contract
  • contract DESIGN
  • PREMIUM (min or max)
  • SALES METHOD used
  • level of UNDERWRITING allowed

MAY 2024 (41 decks)

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