Chapter 20 Flashcards
Why might an actuary look at a possible new product design?
- Awareness of a gap in the existing product range (design a new product)
- Awareness of an inadequacy in an existing product (review design of existing product)
What are the factors to consider in reviewing or designing any product?
AMPLE DIRECT FACTORS
What can the system requirements of new product limit?
The system requirements of a new product may limit either:
* The benefits provided or
* The charging structure to be adopted
With regards to the marketability of the product, what about the benefits offered is important?
The benefits offered needs to be attractive to the market in which it is sold and appropriate for the distribution channel used.
What are important product features that assist with its marketability?
- It should be understandable - even if the product meets specific needs, it will be unattractive if difficult to understand
- Transparent - lack of clarity may hinder sale of product
- Innovative design features
- Additions of options and guarantees
- Charging structure on UL policy - it should be attractive to the market and consideration should be given to whether charges should be guaranteed
What should the premiums of a non-linked contract cover?
- Benefits provided
- Expenses in the most foreseeable circumstances, and
- Provide a profit margin
Into which components can a life insurance product be broken down?
- Savings - company would want to make a profit on investment income
- Protection - premium basis mortality assumptions should cover the risks involved
- Admin - expense loadings must cover the marginal acquisition and admin costs involved
What should the premiums of UL contracts cover?
- The expenses
- Profit margin
How can the sensitivity of a UL contract to profitability variations in future experience be reduced?
- Mortality - make charges for mortality variable at the company’s discretion
- Expenses - make charges for expenses variable at the company’s discretion
- Investment returns - if no investment guarantees, most investment risk is borne by the PH
- Withdrawal rates - do not offer any guaranteed SVs
- Matching - try to match income with outgo as closely as possible by duration
What are the important variables that might negatively impact on profitability?
- Mortality, or another contingency if relevant
- Expenses and expense inflation
- Investment returns
- Withdrawal rates
- NB sales volumes and mix
On what will the acceptability of the level of risk depend?
On the company’s willingness to absorb the risk internally or to reinsure it. (Basically, the IC’s risk appetite)
How can insurance companies deal with large parameter risk?
- Offer the contract in UL and/or reviewable form to avoid LT rate guarantee
- Reinsure a large part of the risk
- Incorporate very ample margins in premium rates
- Offer contract as an additional rider benefit rather than a stand-alone
Describe the concept of cross-subsidy between large and small policies.
Large policies will cross-subsidise smaller policies as larger policies will be overpriced and smaller policies will be underpriced. The larger policies contain an expense loading higher than theoretically required to allow for a smaller expense loading in the small contract to price it cheaper.
What will conflict with the desire to avoid cross-subsidies?
The marketing advantage of a simple premium or charging structure.
How would a company want to price relatively to competitors?
They will not want the structure and level of charges under UL contract to depart too far from those of competitors - it depends on how it will market the contract.
What is the prime influence on the level of competitiveness?
The level of expense charges. Some distribution channels will be more price sensitive than others.
What is a big competitive factor for simple, comparable products?
Premium
What does the IC want to maximise when selling products?
They want to maximise the total contribution to overheads (and profit) that results from selling the products as a whole, not per single policy.
How can the company’s total profit be thought of?
The sum of the total contribution from all the products, less the overhead expenses.
How do you calculate the total contribution from a single product?
(per-policy contribution) * (number of policies sold)
The per-policy contribution is the profit from the single policy net of marginal costs.
How can you maximise the total contribution from each product in a competitive market?
Very low per-policy margins ensuring sales
How can you maximise the total contribution from each product in a non-competitive market?
Higher per-policy margins will be possible without jeopardising volume.
With regards to financing requirements, how would a company want to design benefits and charges of a product?
Unless it has substantial capital resources it will want to design it to minimise its financing requirements.
What advantages do UL contracts have over non-linked contracts when it comes to capital requirements?
- No (or few) expense guarantees
- No (or few) mortality guarantees
- No (or few) investment guarantees
- Possible smaller supervisory solvency margin requirement
