Chapter 1: EA Flashcards
Products typically offered in a life insurance market represents
Reasonably profitable risks to the insurer whilst providing useful benefits to the consumer
A basic theme of life insurance
in return for one or more premiums paid by a consumer, the insurer contracts to pay benefits which are in some way contingent upon human life – payment occurs on death or survival
Simple contracts
provide specified guaranteed benefits in return for the payment of specified premiums
Simple contracts types
non-profit non-linked
OR
without-profit non-linked
Surrender
said to occur when a policyholder fails to pay all of the premiums required under the contract, and receives a lump sum (surrender value) in compensation for the premiums paid to date
Contracts that give guaranteed (minimum) surrender values can exist.
Surrender amount paid
Amount paid (at the date of surrender) would normally not be specified in the contract.
Method used to calculate surrender amount
The method used to calculate the amount paid (at the date of surrender) would normally be disclosed in the policy documentation sent to the policyholders at the inception of the policy.
Paid up
Usually possible for the policy to continue, without paying any more premiums, but for a reduced benefit amount.
What happens when a policyholder stops paying their contractual premiums
Surrender
OR
Paid up
Lapse
Some policies do not pay any benefits if premiums cease before the contractual time
Withdrawal
Lapse & surrender
Basic customer needs met by life insurance contracts
Protection - people (and their dependents) from the financial consequences of unwelcome events (such as death)
OR
Savings - Investments, allowing the policyholder to build up funds for specific things namely:
- income in retirement
- Repayment of loan
Just a lump sum to spend as the policyholder wishes
OR
Mixture of savings and protection
Micro risk
One part of the overall risk picture
Initial capital strain
combination of the initial cash outflow, any prudence in the reserves and the need to establish a required solvency margin means that money has to be found initially in order to write the business
OR
The excess of the supervisory reserve and required solvency capital over the asset share on day 0+
time 0+ =the point immediately after the policy has been issued, after the first premium has been paid, and all the initial expenses have been incurred
When should risked posed to the insurer and mitigating measures be considered?
At the product design stage
Product cycle
Can be used to identify possible risks for the particular product and feasible techniques to manage these risks.
Product cycle areas
Pricing, underwriting, management, marketing & sales, experience monitoring and valuations
Within an organisation make an important contribution to the experience that emerges.
Product design
The product features (eg events covered) are determined as part of product design in the product cycle.
Considered at the product design stage:
- The needs of customers that the product aims to meet,
- risks to the insurer,
- distribution methods and marketing and
- designing administration systems and pricing
The design of the product will be adjusted based on:
- results from the pricing exercises and
- results from risk identification exercises and
- input from:
– marketing department
– sales department
– administration department.
Pricing
imperative that the practices employed by each area of the product cycle are reflected in the premiums charged
E.G.
weaker claims management should be reflected in higher premium rates
Administration
Policy and claims files must be maintained by the insurer.
Administration systems must be able to cope with the complexity of the product designs.
For example:
IP and LTCI policies
the system must be able to make regular claims payments, and record a lot of information about each claim.
An obvious example is that the system should not only be able to record the date a claim starts, but also the reason for the claim, the date it ceased, and why.
Marketing and Sales
may influence the characteristics (and thus the risk) of the lives insured.
The insurer will also need to consider the:
- appropriate distribution method
- the costs of marketing the product
- the costs of selling the product
Underwriting and claims management
The rigorousness of underwriting and claims management:
will have a direct bearing on the claims experience of the product.
Onerous underwriting processes:
may have a negative impact on:
- business volumes and
- a balance is therefore required.
E.G.
Underwriting and claims management are more complex for IP and LTCI products (and possibly for CI if tiered benefits are available) than for most other life assurance products.
Both have fundamental implications for the resulting claims experience.
Experience monitoring and valuation
Impact of reserves:
-the regulatory requirements for the policyholder liabilities & capital requirements should be considered when designing the product.
provides the insurer with information that can be used to update the :
- product design,
- sales processes
- claims processes,
assumptions used in the pricing or valuation of the liabilities.
Appropriate data needs to be gathered and stored in a way that facilitates analysis of this information for experience monitoring purposes.
Group business definition
Any collection of individuals who combine to make a single proposal for uniform insurance cover.
Covers a number of individuals under a single policy document.
Group schemes an be set up by any affinity group but are most commonly set up by employers for their employees, in which case the employer is the policyholder even though those insured are the employees.
As part of employees overall remuneration package.
group policies may be considered to be short-term, regularly renewable products, even if they are written by a life assurance company.
Usually the collected individuals will be employees in the same company and the employer will pay for the premiums either wholly or in part.
In most cases, the employer is the policyholder and the employees are the insured.
Cover would be provided for claims that occur during the period of cover
Group products can arise where:
- the employer pays the whole premium on behalf of the employees
- where the cost is shared between the two parties (the employer may pay part or all of the employee cost but the member must pay for any coverage desired for spouse or children)
- where the employer facilitates with payroll deduction but the employee pays all costs
- where the “group” is not employment based but linked to club membership (affinity groups) or credit cards.
Term difference between individual and group products
Individual products: LT
Group business: ST (1 or 2 yrs)
Endowment assurance
Allow policyholders to save a lump sum by a known maturity date, with the possibility of a lump sum being paid on earlier death.
May also offer surrender values or “paid-up” values, either:
- guaranteed OR
- non-guaranteed terms
May come in different forms:
- without-profits
with-profits
unit-linked
May be sold:
- individuals
- groups
Main risks of endowment assurances
- Investment returns
- Expenses
- Withdrawals
- Mortality
- Anti-selection
Endowment assurance capital requirements of the business depend crucially on:
- Contract design
- Premium payment frequency
- Relationship between the pricing and supervisory reserving bases
- Additional solvency capital requirements
- Level of initial expenses
Endowment assurance - expense risk
Strictly, the risk is that the total actual expenses (over a period) are higher than the total contributions received towards those expenses from the charges and/or premiums received by the company.
Actual marginal costs of administering the contract need to be met.
Marginal costs of a contract/Variable costs
Costs which are incurred because the policy exists.
Provided these costs would not incur if the policy was not in existence.
E.G.
Commission
Cost of postage
Telephone calls to policyholders
printing policy documents or statements
Non-marginal costs
Fixed costs or overheads
E.G.
Staff-related costs
Persistency risk
Risk that the number of withdrawals is different to that expected.
Withdrawals = surrenders. lapses, partial withdrawals & paid-up policies
Withdrawal risk
When asset share is negative, there is a financial risk from withdrawal.
Asset share negative = company will lose money even if it pays the policyholder nothing
Asset share positive = company will lose money if the withdrawal benefit is larger than the asset share.
Asset share
The asset share is the retrospective accumulation of past premiums (Including any investment return earned), less expenses and the cost of cover, at the actual rate of return on the assets. The accumulation could be carried out for a single contract or a group of contracts.
It is also referred to as the earned asset share or the retrospective earned asset share.
In the case of with-profits contracts, allowance may be made for miscellaneous profits from without profits contracts and from surrenders and lapses, and also for the cost of guarantees and any capital support provided.
Bancassurer
Risks under group contracts
Adds no additional risks and any anti-selection risk is likely to be much reduced, particularly if it is compulsory for all eligible members to join the group contract.
Concentration of risk may arise.
Reduced anti-selection risks = restricted choice that individuals may have where group shcemes are concerned.
Endowment assurance - contract design
Key issue:
whether the design enables reserves and solvency margin requirements to be kept low.
the lower the initial reserves = the lower the initial capital requirement
