Chapter 20 - Product design Flashcards
State key consideration with regards to profitability
Product Design
- 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.
With regards to the 3 dimensions of a product:
* Protection: mortality basis should cover risk involved, risk will gradually change and future change should be allowed for if appropriate
- Savings: make a profit on investment income
- Administration: expense loading cover marginal/admin costs incurred, allowing for cross subsidies
Areas of product design important for marketability
5
- 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?
Comment on financing requirements in product design
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
Comment on risk characteristics in product design
Level of risk may be acceptable depends on insurer ability/willingness to absorb risk internally or re-insure
- Mortality risk
well studied and quantified risk, this easy to absorb risk, unless entering new market for that company - Company can do the follwoing for 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
Onerousness of guarantees in product design:
What are the 2 problems that arise with guarantees?
Problems
* suffer a cost that you did not fully expect
* reserve for loss possibility, increasing capital strain
Comment on the sensitivity of profit in product design
Mostly an issue for non-linked contracts, as under unit-linked, possible to have well-matched charging structure which reduces profit sensitivity to AvE
Variables that impinge on profitability:
- investment return
- mortality (or other contingencies, e.g. morbidity, longevity)
- expenses
- expense inflation
- persistency
Minimise sensitivity by:
- 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
List 5 factors which will contribute to the onerousness of an investment guarantee
- size (how much is being guaranteed)
- the period of time for which it holds
- the significance of reserves for the contract (thus a relatively high yield assumption for term assurance business will not be the time-bomb it could be for savings business)
- the volume of business to which it applies
- the capital available to the company to absorb the initial reserving cost and the possible eventual real cost.
