Chapter 10: Contract Design 2 Flashcards

1
Q

Competitiveness

A
  • Premiums charged shouldn’t depart too far from competitors for equivalent product
  • Difficult to compare innovative product or additional benefits
  • Consider likely response of competitors to introduction of product
  • Consider success of similar products from competitors
  • Consider sales method
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2
Q

Profitability

A
  • Cover expected claims and expenses, meet profit criterion
  • May conflict with marketability and competitiveness
  • Minimum premium/ contribution ensures policies make a minimum contribution to fixed expenses
  • Lapse assumptions may be important when considering profitability
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3
Q

Risk appetite

A
  • Key risks of product must be identified and quantified
  • Range of cover = catering for different consumer risk appetites
  • Risk acceptable to insurer depends on ability/willingness to absorb or reinsure risk
  • Optional benefits = anti selection risk
  • New contract = greater risk as company has no past data or experience relating to this contract (uncertainty around setting assumptions due to parameter error)
  • Offering contract in unit linked form will avoid a long term guarantee
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4
Q

Extent of cross subsidies

A
  • Risk = mix of business being different to expected
  • Avoiding cross subsidies may conflict with simple premium structure and admin
  • Core/ additional benefits; Large/small policies; New business/renewals; Lapsing/remaining policies
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5
Q

Level and form of benefits

A
  • Full claim amount or fixed %/ amount of each claim

* Apply excess to each claim

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6
Q

Contract terms and conditions

A
  • Too tight= reduced marketability
  • Too loose = unanticipated claims
  • Advice from lawyers, reinsurers and relevant experts
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7
Q

Consistency with other contracts

A
  • Premiums/ benefits fairly consistent with existing products to avoid discontentment from existing policyholders
  • Pricing and design should be consistent with other products to reduce admin requirements
  • Major change = significant systems development (costs time and money)
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8
Q

Admin systems

A

• If existing admin system can’t cope with complexity, product will have to be simplified/ modified or new admin system will need to be built/bought (may be costly)
• Consider how to minimise costs and load appropriately in the premium
• Increased admin complexity:
o Frequent premiums/ contributions
o Option to lapse
o Any prizes
• More complex= greater risk of error (op risk)

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9
Q

Financing requirements

A
  • Consider new business strain
  • Design to minimise capital requirements
  • Pay regular commission payments over a period of time rather than lump sum at outset
  • Additional capital needed to cover any guarantees
  • Annuities – consider lower initial annuity and max increase if guarantees are involved
  • Consider term of product and size of fund build up
  • Payout linked to contributions = lower financing requirement
  • Financing reqs lower for Unit Linked contracts due to lower benefit guarantees offered and ability to vary charges
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10
Q

Premium pattern

A
  • Need to decide on premium frequency (annually, monthly, etc.)
  • Consumer flexibility = more marketable but more complex to administer
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11
Q

Stat/ reg requirements

A
  • Take into account any stat/ reg requirements on contract design or premiums that can be charged
  • Consider solvency requirements
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12
Q

Accounting implications

A

• Consider effect that new product has on accounting requirements.

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13
Q

Onerousness of guarantees/options

A

• Need to assess likely cost of guarantee, a stochastic model is likely to be most suitable
• Consider whether to use derivatives of replicating basket of assets to match index (if guarantee is index linked)
• Option to withdraw
• Need to be charged for through increase in premium of reduction in benefit
o Not charging through premiums will increase sales but result in adverse reaction when benefits are unexpectedly reduced

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14
Q

Extra wrap up sentence

A

“These contract design factors are not necessarily independent, in that meeting one may mean another cannot be met. The insurer will seek the optimal solution.”

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