Ch20: 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
Main needs met by insurance products 4
A
- Savings
- Protection
- Loss of income
- Conversion of capital into income
- Considering what stage they are in their lives
4
Q
Profitability
Split of profits per product 3
Unit linked 5
A
- Premiums charged sufficient to cover benefits, expenses and provide profit margin
- Products can be broken down into 3 components:
- Protection: mortality assumpt should cover risk involved, risk will gradually change and future improvements should be allowed for
- Savings: profit on investment income, prudent inv ret assumpt
- Administration:
- expense loadings cover marginal acquisition and admin costs incurred
- tot exp covered by tot exp charge allowing for cross subsidies
- Each policy contribute to variable and fixed costs
- Unit-linked
- Risk to profitability is lower as
- investment risk largely borne by policyholder, and
- mort charges variable at company discretion
- Expense charge is also variable (NB for profitability)
- Overall charge sufficient to cover expenses and provide profit margin
- Risk to profitability is lower as
5
Q
Marketability
A
- Innovative design features (make contract more attractive)
- Attractive benefits (understandable to market and appreciated by them)
- Attractive/ competitive charging structure (for UL + consideration of guaranteed chrgs)
- Guarantees and options (premium rates or structure)
- Distribution channel
- More comlex products req brokers to sell
- if using multiple channels, will same price be used?
6
Q
Competitiveness
A
- Structure/level of charges/premium should be similar to competitors. Marketing should be considered.
- Find level of charges that maximize tot contrib from a product
- Balance with volume sold to max profits
- Level of expense charges is NB for competitiveness
- Certain Dbn channels may be price sensitive:
- Eg brokers wnat to find the best deal
- Set charges to cover marginal costs w/no contrib to fixed costs
- Rely on X-subsidies to contribute to fixed expenses
- Unit linked: tot chrges are compared
- Non-linked: Interest, risk and expense elements compared
- W/profits prems influence competitiveness
- Expense and mortality profit retained =>+loading in prem=> + prem
- Market maturity: PH awareness of LT inv perf and prop that is distributed to them
- Market investment characteristics: all insurers invest in uniform way. so have inv perf. so use prem and prop of profits alloc to PH
7
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
- eg newly formed insurer sell UL business initially
- UL advantages over non-linked contracts
- no/few expense guarantees
- no/few mortality guarantees
- no/few investment return guarantees
- smaller solvency capital requirement
- 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
8
Q
Risk characteristics
A
- Consideration given to the level of risk associated with proposed contract design.
- Acceptability depend on risk appetite, ability to absorb/RE risk
- well studied and quantified risk, easy to asborb risk,
- unless entering new market for that company
- If a new market => Large parameter risk
- offer unit-linked/reviewable form contract ( to avoid long term rate guarantee)
- reinsure large part of risk
- incr margins in premium rate
- offer riders rather than standalone
9
Q
Onerousness of guarantees
A
- Company will need to consider onerouseness of any guarantees
- suffer cost not fully expected
- hold higher reserves => increasing capital strain
- Guaranteed surrender value
- compare to asset sahre @ withdrawal
- Risk of losses on early withdrawal as AS is neg
- Model using high withdrawal and large asset stress assumptions
- Investment return guarantee
- Guar SA. Guar Annuity benefits
- W/o profits needs to be considered
- immunisation to reduce financial impact of int movements
- 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)
10
Q
Sensitivity of profit
A
- unit-linked, possible to have well-matched charging structure which reduces profit sensitivity to AvE => Non-linked more sensitive.
- Factors that affect profitability
- investment return
- mortality (or other contigents, e.g. morbidity, longevity)
- expenses
- expense inflation
- persistency
- Minimise sensitivity of profits on UL
- no investment guarantees => all risk on PH
- mortality (make charge for this variable, at company’s discretion)
- expenses (make charge for this variable, at company’s discretion)
- no guaranteed surrender values
- matching (try to match income (charges) with outgo (expenses/benefit cost) as closely as possible by duration
- Redesign non linked products
- No/min SV
- Commission clawback to reduce early withdrawals
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 complicated marketing.
- Expense (PH focusses on expenses)
- Extent expenses can be subsidized from interest and mort profits
- Extent policies cover their marginal costs vs size of prem
- incurred by policy regardless of its size
- setting policy charge which covers marginal cost may be uncompetitive
- so set charge = % prem to use x-sub on larger policies
- Fixed policy fee
- ideally even small policies should cover their own marginal admin costs
- might be a cross subsidy between small policies and large
12
Q
Administration systems
A
System requirements of new product may limit either benefits to be provided or charging structure deployed
- simple product easier to manage
- 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 factors mentioned 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 attractive, 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
Sustainable Investment options
A
- ESG issues have + focus, drive from regs,social resp, marketing
- Consider sustainability of investments
- Environ factors eg CO2 emmissions
- Social factors eg working conditions
- Governancne factorseg acc stds used
