Chapter 7 - other stakeholder interests

Question 1

Stakeholders in the product design

Answer 1

• consumers
• insurers
• other internal parties e.g. actuaries, underwriters, IT
• regulators
• distributors
• other external parties e.g. the actuarial profession

Question 2

Main stakeholder interests of the insurer

Answer 2

1. profitability

2. maintain control of the risk management process

Question 3

Targets of product design and pricing

Answer 3

1. customer acceptability
2. regulatory requirements
3. needs of distributors
4. price competitiveness
5. adequate profitability
6. company culture in product style and price
7. systems and other internal constrains
8. underwriting methodology

Question 4

Customer acceptability

Answer 4

To be attractive, the product must be clear about both:

• the benefits provided in terms of the claims triggers and cash values
• the amounts and variability of premiums

there must also be sufficient benefits to justify the price charged

Question 5

Marketability

Answer 5

• innovative design features make a contract more attractive (and options and guarantees)
• understandable. This aspect is very sensitive to distribution channel

Question 6

Needs of distributors

Answer 6

• product needs to be distributed through appropriate sales channels
• the structure and level of premiums or charges should not depart too far from those of competitors
• input of sales and marketing teams

Question 7

Adequate profitability

Answer 7

• Sufficient margins must be retained to ensure an adequate return on capital but must still be priced at a level that will attract customers
• Company will want to ensure that premiums will be sufficient to cover benefits and expenses in most foreseeable circumstances (and a surplus to reward shareholders for in the case of a proprietary)

Question 8

Company culture in product style and price

Answer 8

Consistency with other products

• major changes will result in significant systems development, which will take time
• benefits in terms of saving time and costs with training admin and sales staff, printing marketing literature
• design which appears more attractive to policyholders may seem unfair to existing policyholders

Question 9

Systems and other internal constraints

Answer 9

• computer/admin systems must be able to cope with design of product
• data must be captured adequately
• reinsurers may be to assist with the provision of statistics

Question 10

Key considerations for systems implications

Answer 10

The actuary must be aware, when proposing a new contract, of what existing systems can accommodate and what can be changed, at what cost and in what timescale.

1. computer systems must record all processes of insurance
2. they must provide information to enable profitability to be assessed
3. new products may require systems’ reorganisation
4. any launch or redevelopment will require reappraisal of priorities
5. the expense relating to the systems changes must be included in the product costing
6. time must be allowed for development and testing
7. continuing dialogue with a key systems decision maker will be important in the process

Question 11

Data capture - the information technology must:

Answer 11

1. capture individual policy details at inception
2. align these to claims information
3. combine the policy and claims data to monitor profitability
4. group by risk characteristics
5. be able to add external data as appropriate
6. be able to model and project, including other aspects of company cashflow

Question 12

claims underwriting

Answer 12

• it is imperative that these procedures are consistent with the underwriting criteria that are used to accept policyholders and important also that they are consistent with the data underpinning the pricing calculation
• should be consistent with policyholder expectations and competitors in terms of length of time prior to claim settlement and amount of info required

Question 13

Offering guarantees results in two problems

Answer 13

1. possibly having to suffer a cost you did not fully expect

2. probably (depending on the supervisory regime) having to reserve for this possibility from the outset

Question 14

Rules for product design / guidelines for offering guarantees

Answer 14

1. ensure there is a customer need
2. price as accurately as possible, projecting a range of outcomes
3. charge the cost of the capital to the product if possible
4. obtain sound reinsurance, building the cost into the product if necessary
5. ensure the marketing and other policy literature is clear in its description of the guarantees
6. ensure the sales process explains clearly any guarantees and their implications on premiums and benefits
7. ensure that adequate reserves are in place when the business is written

Question 15

Problems with offering tiered benefits

Answer 15

1. problems designing the benefit levels and claims triggers at each level
2. pricing
3. underwriting (both initially and at the claim stage)

Question 16

Problems in designing the benefit levels

Answer 16

• difficult to define the additional stages of disease that trigger benefits that are both legally and medically objective while being understandable to the consumer
• weaknesses in definitions could result in more claims

Question 17

Problems in pricing the benefits

Answer 17

• finding statistics for the current definitions is difficult enough with historic insured experience still being relatively limited
• having to find four times as many rates for severity levels and transition intensities between them, for all ages, both genders and possibly smokers and non-smokers is going to be challenging with any degree of accuracy
• the underlying incidence and transitions may change frequently in the future
• many overlaps between related illnesses that makes pricing more complex and picture for policyholder more confusing.

Question 18

Problems in underwriting

Answer 18

• the underwriter is faced with the prospect that the brining forward of potential claims situations is going to increase the importance of any pre-existing conditions and change the seriousness of any material non-disclosure
• initial underwriting will be more stringent (time and money)
• claims manager is going to be faced with many more claims forms with complex definitions and policyholder pressure to upgrade

Question 19

What influences the rate of medical costs inflation?

Answer 19

1. an ageing population of policyholders
2. lack of sufficient supply of hospital beds or professional medical practitioners forcing up prices
3. the move to newer and more expensive treatments or drugs for certain conditions
4. a greater propensity for policyholders to claim following a perceived deterioration in State-provided healthcare
5. medical costs will increase as a result of increase in salaries of medical staff and the cost of equipment

Question 20

Regulator’s priorities

Answer 20

1. that insurers remain solvent
2. that consumers are considered in all decisions and that any disadvantages to consumers in terms of sales, admin and claim payment are minimised

Question 21

Regulator as a stakeholder

Answer 21

• assess integrity and solvency of insurer by looking at reports
• check that policy has clear and unambiguous wording and that it offers a range of benefits that a purchasing customer might expect
• the product should represent reasonable value for money
• monitor sales process to ensure that an appropriate product is sold at the right level, taking into account customer needs and ability to pay, that there is no undue pressure to purchase and that promises made as regards to the product are in keeping with the policy conditions

Question 22

What does efficient control of the risk management process include?

Answer 22

1. ensuring there is a clear set of conditions and policy rules
2. having sufficient, relevant data for pricing and subsequent monitoring
3. appropriate reinsurance
4. minimising financing requirements
5. consideration of equity between policyholders
6. consideration of cross-subsidies between contracts
7. being aware of guarantees offered
8. premium reviews for reviewable or renewable policies

Question 23

CI control procedures

Answer 23

• effective underwriting and claims control to protect against anti-selection and non-disclosure
• imposing a survival period on stand-alone policies
• adequate reserves to cover late-notified claims
• manage policyholder expectations in light of new diseases and market changes
• careful policy wording
• data may be scare when offering tiered benefits, so large margins and/or reinsurer cooperation needed

Question 24

LTCI control procedures

Answer 24

• policy designs that are robust to changes in the provision of care by the State and the regulator’s interpretation of the benefits promised

Question 25

PMI control procedures

Answer 25

• control costs by agreeing and monitoring provider prices
• control claims costs through pre-authorisation of benefits
• ensuring that price increases can be justified to policyholder on renewal