Chapter 3 - Product Design, Pricing and Distribution

Question 1

Ways to mitigate risks: (8)

Answer 1

1. Underwriting
2. Waiting periode
3. Exclusions
4. Premium reviews
5. Age limits
6. Clear disclosure during sale and in policy contract (mitigate reputational risk)
7. Reinsurance
8. Retention incentive

Question 2

Critical illness benefit payable in any of the following 3 events:

Answer 2

1. Upon happening of event
2. Upon reaching a defined degree of impairment
3. On undergoing a surgical procedure

Question 3

4 Characteristics of an illness that makes it appropriate to be included in CI product:

Answer 3

1. Condition perceived by public to be serious and to occur frequently
2. Each condition covered can be defined clearly so that there is no ambiguity at claim stage
3. Sufficient data is available to price the benefit
4. There is the ability to avoid anti selection

Question 4

4 Major diseases covered by CI:

Answer 4

1. Heart attack
2. Stroke
3. Coronary artery bypass graft (CABG)
4. Cancer

Question 5

Needs met by CI: (5)

Answer 5

1. Income can be provided from the lump sum to buy an annuity
2. Repay mortgage or other loan
3. Business partners can purchase CI policies on the lives of each other
4. Recuperation after illness
5. Change in lifestyle can be funded (eg to move to less stressful job)

Question 6

Definitions of disability: (3)

Answer 6

1. Occupation based
2. Related to ADLs or ADWs as a claim criteria
3. Referring to functional impairment and physical impairment

Question 7

Activities of daily living: (6)

Answer 7

1. Feeding
2. Dressing
3. Washing
4. Toileting
5. Mobility
6. Transfer

Question 8

Advantages of ADL over occupation based definitions: (4)

Answer 8

1. Can be applied to wider range of lives
2. Can be applied besonderhede retirement
3. Offer simplicity of using only one definition throughout the term of the policy
4. Less subjective than one based on ability to perfomr an occupation

Question 9

Exclusions on IP may include: (5)

Answer 9

1. Claims resulting from drug/alcohol abuse
2. Self inflicted injury/attempted suicide
3. War
4. Criminal activities
5. Failure to follow appropriate medical advice

Question 10

After the loss of a key individual, employer has the following options: (4)

Answer 10

1. Find a suitable replacement
2. Up-skill another employee
3. Change business model
4. Consider winding up the business

Question 11

Premium waiver can be applied in the following events: (3)

Answer 11

1. Disability of specified life insured
2. Death of specified life insured
3. Retrenchment of specified life insured

(Where specified life insured can be different from the life insured covered under the main policy)

Question 12

In investment products PH can choose one or more of the following types of underlying portfolios: (3)

Answer 12

1. Market linked portfolio, with or without investment guarantee
2. Smooth bonus portfolio
3. Guaranteed product

Question 13

As part of the Effective Annual Cost measure charges on investment products should be split into these 4 components:

Answer 13

1. Investment
2. Advice
3. Administration
4. Other

(Must be shown as annualised percentages)

Question 14

Mechanisms to limit market risk for smooth bonus portfolios: (3)

Answer 14

1. Use of market value adjusters
2. Choice of assets to invest in
3. Management of bonus stabilisation reserves

Question 15

What is a deferred compensation contract?

Answer 15

Employer takes out endowment policy on the employee and pays the premiums.
In event of claim, proceeds are paid to employer, who pays this over to employee ito the arrangement

Question 16

Traditional annuities can be split up into 4 groups that indicates when payments stop:

Answer 16

1. Single life annuity
2. Joint life annuity
3. Temporary annuity - pmts continuing while PH is alive within a specified term
4. Term certain annuity

Question 17

Different ways in which employer benefits can be structured: (3)

Answer 17

1. Employer directly take out group insurance policy for the employees
2. Employer establish pension or provident fund to facilitate and organise the investment and payout of employees’ RA
3. Umbrella funds are pension or privident funds that pool the retirement investments of multiple, unrelated employers into a single legal structure

Question 18

Characteristics of an approved scheme: (2)
(approved schemes have premiums that are tax deductible, and benefits that are taxed)

Answer 18

1. Must contain an element of retirement funding
2. Approved schemes can only cover the employee, cannot provide cover to family members

Question 19

Life insurers can be involved in retirement products in the following ways: (3)

Answer 19

1. LI can administer pension or provident funds
2. LI can offer investment portfolios to pension or provident funds
3. LI can offer insurance products, in the form of risk/annuity products, to pension or provident funds

Question 20

Definition of Micro insurance:

Answer 20

Insurance that is accessed by low-income populations, providedby a variety of different entities, but run in accordance with generally accepted insurance practices

Question 21

Objectives of micro insurance regulatory framework: (6)

Answer 21

1. Facilitate the formalisation of currently informal providers, and in the process promote the formation of regulated and well-capitalised insurers, as well as small business development
2. Lower barriers to entry, which should encourage broader participation in the market and promote competition among insurers
3. This would further support poverty alleviation through economic growth and job creation
4. As well as provide increased access to protection against losses
5. Enhance consumer protection within this market segment through appropriate prudential regulation and improved enforcement of compliance
6. Facilitate effective supervision and enforcement, thereby supporting the integrity of the insurance market as a whole

Question 22

Micro insurers have the following lighter prudential requirements: (2)

Answer 22

1. Lower minimum regulatory capital requirements
2. A simpler, dedicated prudential regulatory model suited to the risk profile of micro-insurers

Question 23

Features of burial societies: (6)

Answer 23

1. Offer financial support for funeral costs for their members
2. Fixed amounts paid for funeral benefist are subject to a low minimum
3. Membership size is limited
4. Not covered by Insurance Act
5. Not regulated by PA
6. Primary regulator is the FSCA

Question 24

Features of friendly soceities: (4)

Answer 24

1. Allowed to offer guaranteed funeral benefits upnto max of R15 000
2. Operate under Friendly Societies Act
3. Have limited reporting requirements to FSCA.
4. In some cases this requires periodic actuarial valuation as well as actuarial scrutiny of any benefit/prm changes

Question 25

Amendements to the long term insurance PPT 2017 set out additional requirements for Micro insurance and funeral products: (5)

Answer 25

1. Term if Micro insurance is limited to 12 months (does not apply to funeral)
2. Policy benefits must be defined on a sum assured (rather than indemnity) basis
3. Waiting periods may not exceed one quarter of the term of the policy
4. Limitations on exclusions that can be applied, and exclusions for pre existing conditions are not permitted
5. Valid claims must be settled within 2 business day of receipt of full documentation

Question 26

Persistency risk can be mitigated through: (2)

Answer 26

1. Allowing PHs to skip a certain number of prms before cancelling the product
2. Introducinf automatic prm deductions from salaries/wages

Question 27

Persistency risk can be mitigated through: (2)

Answer 27

1. Allowing PHs to skip a certain number of prms before cancelling the product
2. Introducinf automatic prm deductions from salaries/wages