Chapter 4 - Contract Design and Pricing

Question 1

Factors to consider when determining whether a particular design of contract is suitable: (8)

Answer 1

1. Marketability
2. Distribution method
3. Profitability
4. Financing
5. Administration
6. Regulatory and industry requirements
7. Company’s reputation
8. Reinsurance

Question 2

Discounted CF method is the most common approach to calculate premiums, as it allows for: (11)

Answer 2

1. The measurement of expected return on capital
2. The determination of the sensitivity of profitability to key parameters
3. Explicit allowance for reserving and solvency requirements
4. The determination of financing needs
5. Modelling of withdrawals and conversions to paid-up
6. Modelling of complex charge and benefit designs
7. Complex assumption sets, including stochastic assumptions
8. Explicit modelling of options and guarantees
9. Modelling of complex reinsurance arrangements
10. The term structure of interest rates
11. More accurate tax modelling

Question 3

In determining rating factors, the following criteria should be considered: (6)

Answer 3

1. Its significance
2. Whether it is measurable
3. Whether it is verifiable
4. Whether it is socially accepted and legal
5. Correlation to factors already used
6. Market practice

Question 4

When setting the basis for pricing purposes, the following steps would typically be followed: (5)

Answer 4

1. Identification of reference points
2. Identification and assessment of rating factors
3. Determining the crude incidence rates
4. Graduation of the crude experience
5. Testing the basis