Chapter 6 Flashcards
What are the 6 product development process steps?
1) product planning
2) comprehensive business analysis
3) technical product design
4) product introduction
5) monitoring, evaluation, and feedback
whats another name for technical product design for life insurance?
pricing
What are some important objectives for product design?
1) ensuring adequate future investment income to support the fin obligations.
2) providing an adequate return to the company’s owners
3) guaranteeing a level of future benefits that the company can be certain to deliver underknown future conditions.
4) covering company’s expenses of supporting the product
5) identifying pricing and commission structures that will suceed in the market place
6) understnading specific prodcut riks in terms of the company’s sick standards.
Why deos product design pose a risk to a company?
the profitability of a new product depends on suing correct prodcut design assumptions.
- risk increases as new product levels of innovation and complexity rise.
When does a life insurance product increase the risk of product underpricing?
when a company designs and issues new complex prodcuts, uses new distribution channels, significantly relaxes uw STDs or assumes admin expense levels are below hx costs.
Insurance company’s offer what variations in premium rate structures for individual life insurance products
1) premium rate structure divided into STD, substandard, and preferred. Sexes, smokres, ages.
2) premium rate structured by graded face amounts
3) contingency pricing structure
4) indeterminate premium structure.
what is a contingency pricing structure
gives the company mechanism for adjusting the company’s charges for an in-force product to reflect the company’s financial results from the product.
What indeterminate premium structure?
allows the comapny to peridocially reset premium rates on in-force whole life products while guaranteering customers that premiums will not exceed a max specific level.
- contract language has scale of guaranteed max premiums
Actuaries use product development software to model new product designs. They can support deterministic and stochastic approaches. how?
1) deterministic modeling for simple products like term life, whole life and fixed immediate annuitieis
2) stochastic modeling for more complex products like variables- because it provides detailed decision information about the volatile risks associated with second guarantees
Each assumed value in a life insurance or annuity product design is an actuarial assumption. define this.
in a typical product design, actuarial assumptions are needed for the insurer’s operating expenses, cost of providing benefits, and investment earnings.
What do you call records of the company’s past expenses?
expense experience
- the credibility of the data refers to the predictive value of the data set for a given predictive purpose.
define cost of benefits in product design
the cost of benefits, sometimes knownas the cost of insurance, is the value of all guaranteed benefits.
How can you express the projected cost of a single insurance benefit?
projected cost of a single benefit for a given policy year = (potential benefit amount payable) x (profitability that the benefit will be payable)
Define mortality rate
the rate at which people in a group of insureds die-
What is policyholder behavior?
refers to the benefit utilization choices of customers who own life insurance anuities.
what is policy holder behavior risk?
refers to the company’s increased exposure to volatility in cash flow and costs of benefits as a result of customer’s choices.
- can be difficult to incorporate into deterministic moedls.
Policyholder behavior risk is inherent in what product design features?
1) felxible premiums that allow customers to select timing and amount of premium payements
2) provisions that allow owners to change investment allocations between guaranteed and nonguraranteed investment subaccounts
3) provisions for surrenders, withdrawals and lapes, which cxs can terminate or reduce the value of the contact
4) options for reinsutatement and conversions of life insurance
5) options for convertign deferred annuities to a payout basis
6) provisions for assignment of ownership rights to a third party
7) secodnary guatantees attached to such products as variable annuities.
What is a derivative security?
a fianncial security, (stock) that derives its value from another security.
A hedging program involves hedge costs- what are there?
expenses for trading and holding the derivative securities. They can magnify the portential profits or losses from a prodcut.
What are examples of risks that can product negative financial outcomes for products?
1) unfavourable swings in market interest rates
2) unfavourable regulatory desicions, unfavourable court decisions, and unfavourable changes in the law, including tax law.
3) unfavourable deviations from values assumed in a deterministically modeled product design
4) Negative tail scenaries,
to manage investment risk, actuaries and investment experts must set investment policies. What are investment policy ?
limits the asset types- by security, issuer, credit rating and other features- and the proportions of the assets the company will use to support products.
what are Negative tail scenarios?
highly unfavourable scenarios identified in a stochastically modled product design.
How do you test a product design?
modeling the financial results for one or multiple sets of estimated values and comparing the results to establish objectives for the product.
- tests examine the product’s profitability, assets, reserves, and cash flows.
what are some examples of changes that would orginarily improve a product model’s profitability with all other factors remaining the same?
1) increase charges to customers
2) decrease product expenses
3) decrease benefit costs
4) increase investment earnings.
what parts make up the budgeting and scheduling process for new products?
1) preparing a budget for the human, financial and computer resources needed to omplement the product
2) developoing a project schedule
What is a product developement budget?
project planning document that shows the costs associated with each planned work activity and the anticipated revenue from the new product.
What is a project schedule?
project planing timetable that shows the times required for the completion of planned tasks and the relationsh`ip among these tasks.
what happens during product introduction?
the company implements the plans and product design and then offers the product for sales.
There are two main phases of product introduction. What are they?1
1) product implementation
2) product launch
what is product implementation/.
conssit of establishing the administrative strucutres and processes necessary to offer the product for sale.
what steps are involved in product implementation?
- obtaining regularoty approval per jurisdiction
- designing promotion and traning material
3) developing and structuring systems needed to market and admin the product
4) bringing information online
5) target advertising
6) press releases and other promotions
7) training sales staff, admin staff,
8) conducting distribution meetings and seminars to introduct the new product.
When does product launch occur?
when the company finally offers the product for sale.
To speed up the implementation process, comapnies generally divide product implementation activites into what 2 categories?
1) day 1 function: product admin and IT elements that must be in place and functioning when product is first made available.
2) Day 2 functionality:: product admin and IT elements that a company may delay in making functional until after day 1,
What happens after the product is introduced?
Monitoring and evaluation phase. The ongoing monitoring, evaluation and feedback may result in monir refinement or major innovations.
What can companies monitor to evaluate a product’s success?
1) value and number of contracts sold
2) actual compared to expected product profitability
3) numebr of new customers
4) demographic characteristics of purchase
5) surrender or withdrawal rates
6) mortality rates
7) sales through various distribution channels
8) impact fo the prdouct on other products.
What are some factors that can contribute to poor sales of a new product?
1) inadequate compensation structures for sales
2) incorrect interpretation fo the needs of the taget markrt
3) indadeuqate traning of sales producers about the product
4) competition from another product offered by the same company or by a competitor.
what can a company do if the sales of a new product are poor?
1) redesign the prodcut
2) change the product underwriting guidelines
3) using a different distribution system
4) implementing a sales incentive program
5) pulling the product
In product operations, what is an adverse deviation?
produces a decrease in actual product profitability relateive to assumed product profitability.
what is a provision for adverse deviation (PAD)?
any amount inlcuded in the assumption valuye to provide an allowance for unexpected negative outcomes.
What is a favourable deviation?
difference between actual and assumed product values that produces an increase in actual product profitability relative to assumed product profitability.
When does a favourable deviation occur?
product revenue > that assumed
benefit payments < than assume
product expenses are < than assumed.
