Chapter 20 - Product design Flashcards

1
Q

List 18 factors to consider when designing or redesigning a contract

A

AMPLE DIRECT FACTORS

Administration systems
Marketability
Profitability
Level and form of benefits
Early leavers benefits

Discretionary benefits
Interests and needs of customers
Risk appetite of the parties involved
Expenses vs charges
Competition
Terms and conditions of the contract

Financing (capital requirements)
Accounting implications
Consistency with other products
Timing of contributions or premiums
Options and guarantees
Regulatory requirements
Subsidies (cross-)

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2
Q

What advantages to unit-linked contracts offer over non-linked products

A
  • No (or few) expense guarantees
  • No (or few) mortality guarantees
  • No (or few) investment return guarantees
  • Possibly a smaller supervisory solvency margin requirement
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3
Q

How can the capital strain of a non-linked product be reduced

A

By reducing:
- initial acquisition expenses
- initial administration expenses
- Valuation strain, via:
– Increasing the valuation interest rate
– Reduction of guarantees

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4
Q

What could the company do if it is faced with a large parameter risk

A
  • Offer the contract in unit-linked and/or reviewable form to avoid a long-term rate guarantee
  • Reinsure a large part of the risk
  • Incorporate very ample margins in the premium rates
  • Offer the contract as an additional ‘rider’ benefit rather than a stand-alone
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5
Q

Offering guarantees results in two problems

A
  • Possibly having to suffer a cost that you did not fully expect
  • Probably having to reserve for this possibility from the outset - thereby increasing the capital strain of the product
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6
Q

How can product design for unit-linked contract minimise the sensitivity of profitability to adverse experience of these factors:
- investment return
- Mortality
- Expenses
- Withdrawal rates
- Matching

A

Investment return: If there are no investment guarantees then most of the investment risk is borne by the policyholder
Mortality: Make the charge for this variable at the company’s discretion
Expenses: Make the charge for this variable at the company’s discretion
Withdrawal rates: don’t offer any guaranteed surrender values
Matching: try to match income (the charges) with outgo (expenses and benefit costs) as closely as possible by duration, especially with regard to the initial expenses

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7
Q

What are the factors that might impinge on profitability

A
  • Investment return
  • Mortality
  • Expenses, including expense inflation
  • Withdrawal rates
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8
Q

The expected future experience of the policyholder will depend crucially on three things:

A

The target market for the contract
The underwriting controls applied
The expected change in the experience since the time of the last historical investigation not the point in time at which the assumptions will apply on average

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