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3. Exam 3.1 > Chapter 10: Contract design > Flashcards

Chapter 10: Contract design Flashcards

1
Q

Contract design factors

A
  • MARKETABILITY
  • PREMIUM / contribution pattern
  • PROFITABILITY
  • BENEFITS — level and form

C - CONSISTENCY with other contracts
O - The characteristics of OTHER STAKEHOLDERS involved in contract design
N - customer NEEDS and interests
T —- benefits TAKEN EARLY / discontinuance benefits
R - RISK APPETITE of the parties involved
A - ADMINISTRATION systems
C - COMPETITION
T —- discretionary benefits

F - FINANCING requirements
A - ACCOUNTING implications
C - CHARGES vs expenses
T - contract TERMS and CONDITIONS
O - OPTIONS or guarantees
R - statutory / REGULATORY requirements
S - extent of cross-SUBSIDIES
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2
Q

Parties involved in contract design (7)

A
  • client or clients
  • client’s customers
  • actuaries
  • accountants
  • lawyers
  • administrators
  • financial backers
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3
Q

3 influences on client’s actual needs

A
  • chosen market
  • available capital
  • available expertise
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4
Q

3 influences on the actual needs of a client’s customers

A
  • capacity to pay
  • risks to be covered
  • benefit that are needed at different times in the future
  • attitude towards financial risk
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5
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 of modifications to the benefit design.
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6
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.

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7
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.

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8
Q

Stakeholders involved in contract design:

- Financial backers

A

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

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9
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.

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10
Q

3 Basis motor insurance is commonly written on

A
  • 3rd party only
  • 3rd party, fire and theft
  • fully comprehensive
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11
Q

Level and form of the benefits to be provided vary according to (3)

A
  • client’s needs
  • risks to be covered
  • client’s ability to pay
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12
Q

Financial products and schemes often contain terms and features that provide options to the client with respect to: (4)

A
  • payment of premiums
  • benefits
  • use of the contract proceeds
  • other items
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13
Q

4 Commercial considerations associated with contract design

A
  • profitability
  • marketability
  • competitiveness
  • statutory / regulatory requirements
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14
Q

5 important factors that might impinge on the profitability of an insurance contract

A
  • Claims experience
  • Expenses & expense inflation
  • investment returns
  • withdrawal experience
  • new business sales volumes and mix
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15
Q

4 Elements regarding the profitability element of claims experience

A
  • frequency
  • severity
  • inflation
  • options and guarantees
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16
Q

Regulation can affect (5)

A
  • CAPITAL REQUIREMENTS of a contract
  • contract DESIGN
  • PREMIUM (min or max)
  • SALES METHOD used
  • level of UNDERWRITING allowed
17
Q

New business strain

A

New business strain arises because the premium received in the first year may be less than

  • sum of the initial expenses,
  • initial commission paid
  • initial increase in provisions (or reserves)
  • and the initial solvency capital requirements.
18
Q

4 methods of financing benefits

A
  • pay-as-you-go
  • funding all the benefit in advance
  • regular payments building up a fund
  • paying an amount when the event happens for example purchasing an annuity at the point of retirement
19
Q

Pay-as-you-go

A

A situation where the sponsor makes the necessary payments only at the points that each separate tranche of a benefit becomes due.

20
Q

Costs for an insurance company setting up a contract

A

INITIAL:

  • contract design
  • advertising/sales
  • commission

ADMINISTRATION:

  • of setting up new client records
  • the ongoing administration of collecting contributions / premiums
  • the administration of paying benefits as they fall due

OTHER:

  • management of assets
  • the profits of the provider
  • the overheads of the provider

3. Exam 3.1 (56 decks)

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