Chapter 20 Product Design Flashcards

1
Q

List 12 factors to be considered when assessing a product design

A
Financing requirements
Onerousness of guarantees
Risk characteristics
Competitiveness
Extent of cross subsidies
Distribution channel
Consistency with other products
Regulation
Admin systems
Marketability
Profitability
Sensitivity of profit
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2
Q

State key consideration with regards to profitability

A

premiums charged sufficient to cover benefits, expenses and provide profit margin.

This will depend on the volume of sales achieved as well as the per policy premium/charging rates.

Protection: mortality basis should cover risk involved, risk will gradually change and future chance should be allowed for if appropriate

Savings: profit on investment income

Administration: expense loading cover marginal/admin costs incurred, allowing for cross subsidies

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3
Q

Areas of product design important for marketability

A

Innovative design (features make contract more attractive)

Attractive benefits (understandable to market and appreciated by them)

Attractive charging structure (for UL + consideration of guaranteed charges)

Guarantees and options (premium rates or structure)

Distribution channel
+impacts complexity of product which can be sold
+if using multiple channels, will same price be used?

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4
Q

The product design factors are not necessarily independent. Compromise will usually need to be struck.

A

Profitability

Financing requirement

Risk characteristics

Onerousness of guarantees

Sensitivity of profits

Marketability

Competitiveness

Extent of cross subsidies

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5
Q

Comment on the sensitivity of profit in product design

A

Mostly an issue for non-linked contracts, as under unit-linked, possible to have well-matched charging structure which reduces profit sensitivity to AvE

Impinge on profitability

+investment return

+mortality (or other contingencies, e.g. morbidity, longevity)

+expenses

+expense inflation

+persist-ency

Minimise sensitivity

+investment return (if there are no investment guarantees)

+mortality (make charge for this variable, at company’s discretion)

+expenses (make charge for this variable, at company’s discretion)

+withdrawal rates (don’t offer surrender/guaranteed values)

+matching (try to match income (charges) with outgo (expenses/benefit cost) as closely as possible by duration

Redesign non linked products
to reduce profit sensitivity
e.g. commission claw-back to reduce sensitivity to withdrawal

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6
Q

Comment on competitiveness in product design

A

The charging structure will be important for united-linked contracts as other characteristics influence risks that are borne by the policyholder

The level of expense charges, interest rate component and risk component will be important for non-linked contracts

The extent of competitiveness regarding with-profit contracts will depend on:
+Distribution of expense and mortality profit
+Market Maturity
+Market Investment characteristics

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7
Q

Comment on financing requirements in product design

A

Unless company has substantial capital resources, will want benefits/charges to be designed to minimise financing requirement.

UL advantages over non-linked contracts
\+no/few expense guarantees
\+no/few mortality guarantees
\+no/few investment return guarantees
\+smaller supervisory solvency margin requirement

Reduce strain on non-linked contract
+reduce initial acquisition costs (commission)
+reduce initial administration costs
+reduce valuation strain (increase val interest rate, reduce guarantees)
+financial reinsurance

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8
Q

Comment on risk characteristics in product design

A

Level of risk may be acceptable depends on insurer ability/willingness to absorb risk internally or re-insure

Death contingency
well studied and quantified risk, this easy to absorb risk, unless entering new market for that company

Large parameter risk
+unit-linked/review-able form contract ( to avoid long term rate guarantee)
+re-insure large part of risk
+incorporate very ample margin in premium rate
+offer is rider rather than standalone

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9
Q

Comment on onerousness of guarantees in product design

A

Problems
+suffer cost not fully expected
+reserve for loss possibility, increasing capital strain

Guaranteed surrender value
+generousness scale will be measure by reference to asset share
+onerousness can be quantified as their impact on product design on profitability under various scenarios

Investment return guarantee
for without profits non-linked business

Onerousness depends on
+size (how much guaranteed)
+period of time for which it holds
+significance of reserves (for the contract)
+volume of business to which it applies
+capital available to company ( to absorb initial reserving cost/eventual real cost)

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10
Q

Comment on extent of cross subsidies in product design

A

The company needs to consider the extent of sub-siding between small and large contracts. The marketing advantage of a simple premium and charging structure may conflict with avoiding cross-subsidies.

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11
Q

Comment on administration systems in product design

A

The issue of compatibility with the administration system can also be extended to cover the aspect of simplicity.

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12
Q

Comment on consistency with other products in product design

A

Company may wish to ensure charging/benefit structures of new policy are at least similar to any existing business.

Reduce system development (saves time)

Less training staff (administration, sales car, staff printing and marketing literature)

Unfair to existing policyholders (if new design appears more attractive, which leads dissatisfaction and possible marketing risk

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13
Q

Comment on regulatory requirements in product design

A

Company must adhere to any regulatory requirements which should be taken into account in product design, e.g. maximum charges, treating customers fairly

meet normal standards of professional ethical behaviour

Reccommended by professional guidance

regulatory requirement

Foster ongoing trust and good relations

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