Chapter 7 - Other stakeholder interests

Question 1

Why is it important for the insurer to take account to take into account of the customers’ interests in the design of a product?

Answer 1

If the product does not meet the interests if the customer, then:

a) It will not be attractive and thus the insurer will be unlikely to sell many policies

b) there will be customer dissatisfaction which will lead to a bad reputation and the risk of loss of future sales

Question 2

What is the insurer primarily interested in?

Answer 2

In ensuring that it remains profitable

Question 3

What are the various targets that an insurer wants to meet?

Answer 3

1. Customer acceptability
2. Regulator requirements
3. Needs of distributors
4. Adequate profitability
5. Company culture in product style
6. Systems and other internal constraints
7. Underwriting methodology

Question 4

Customer Acceptability

Answer 4

For the product to be attractive, it must be clear about the benefits provided and the amounts and variability of premiums

The product has to meet customer needs and/or provide some element of customer gain

Question 5

Regulator requirements

Answer 5

Product designs need to comply with the relevant regulation

Question 6

Needs of distributors

Answer 6

Products need to be distributed through appropriate sales channels

Product has to competitive in order to achieve forecast sales volumes

The structure and levels of premiums should not depart too far from those of competitors

Input of sales and marketing teams is important since they will give the actuary a better feel for what might sell in the market place. It will also allow the actuary to get insight into customer needs and a view of what the competition is doing.

Question 7

Adequate profitability / return on capital

Answer 7

A company will want to ensure that the premiums charged are sufficient to cover benefits and expenses, and meet the required profit criteria

Question 8

Company culture in product style and price

Answer 8

The charging and benefit structure should be similar to other products of the company and company’s structure as a major change will result in significant systems development.

There is also a possibility that a design, which seems attractive to policyholders, may seem unfair to existing policyholders and may lead to some dissatisfaction and possible marketing risk

Question 9

Systems and other internal constraints

Answer 9

Administration systems must be able to cope with the design of products. Key considerations are:

a) computer systems must record all processes of insurance

b) they must provide information to enable profitability to be assessed

c) new products may require systems’ reorganisation

d) any launch or redevelopment will require a reappraisal of priorities

e) the expenses relating to the systems changes must be included in the product costing

f) time must be allowed for development and testing

g) continuing dialogue with a key systems decision maker will be important in the process

Question 10

What should information technology do?

Answer 10

It must:

a) capture individual policy details at inception

b) align these to claims information

c) combine the policy and claims data to monitor profitability

d) group by risk characteristics

e) be able to add external data as appropriate

f) be able to model and project

Question 11

Underwriting methodology

Answer 11

Claims procedures need to be consistent with the underwriting criteria that are used to accept policyholders.

They also need to be consistent with the data underpinning the pricing calculation.

Claim procedures need to match policyholder expectations in the length of time prior to claim settlement and the amount of information required.

Question 12

Importance of underwriting

Answer 12

• Prevents the insurer from accepting sub-standard risks when the policies were originally issued

Question 13

What will happen if a product fails to satisfy each of the following criteria:

a) sufficient sales incentive to encourage distribution

b) priced to attract customer

c) sufficient margins to ensure an adequate return on capital

Answer 13

a) sales volume will be too low

b) market share and volume will fall

c) if margins are not sufficient, this may mean that prices are very competitive, and sales volumes will be higher than expected. Thus more capital is needed, and more of the insurer’s capital will be earning a lower rate

Question 14

Risk pricng

Answer 14

It ensures that there is a clear set of conditions and policy rules

Actuaries estimate the likely benefit outgo from the contract design and in order to do this, they need to ensure that there is sufficient and relevant data for pricing and subsequent monitoring

Consideration will need to be given to the acceptability if the level of risk associated with a proposed contract design. The level of risk acceptable will depend on the company’s ability to absorb risk internally or to reinsure it

Appropriate reinsurance is important

Question 15

Financing requirement

Answer 15

Benefit and charges need to be designed to minimise the financing requirement

This is important especially for new healthcare insurer because of the small amount of free assets that they have available to finance new business

Question 16

Cross-subsidies and equity

Answer 16

There needs to be consideration of equity between policyholders as well consideration of cross-subsidies between contracts

The marketing advantage of a simple premium or charging structure may conflict with a desire to avoid cross-subsidies

Question 17

Cost of guarantees

Answer 17

Offering guarantees has two problems:

a) possibly having to suffer a cost that you did not fully expect

b) probably having to reserve for this possibility from the outset thus increasing the capital strain

Question 18

What are the guidelines that should be followed when deciding whether or not to offer guarantees?

Answer 18

• ensure that there is a customer need
• price as accurately as possible, projecting a range of potential outcomes
• obtain sound reinsurance
• ensure that marketing and other policy literature is clear in its description of the guarantees
• ensure that the sales process explains clearly any guarantees and their implications for premiums and benefits
• ensure that adequate reserves are in place when the business is written

Question 19

Describe the stakeholder interests of the shareholders of an insurance company in the design of a product

Answer 19

a) the high market price of their equity which in turn depends on the future dividend payments

b) to ensure regular profits the company will need a good reputation

c) company should sell products that contribute to the profit stream

d) satisfaction that all products have an acceptable balance between risk and return

e) shareholders want confidence that the directors and management are competent and capable of running the business

Question 20

What are product-specific control procedures that an insurer as stakeholder in CI insurance can implement?

Answer 20

• effective underwriting and claims control to protect against anti-selection and non-disclosure
• imposing a survival period on stand-alone policies to avoid “death” claims
• adequate reserves to cover late notified claims
• managing policyholder expectations in the light of new diseases and market changes
• careful policy wording, especially for tiered benefits
• data may be scarce when offering tiered benefits, so large margins and/or co-operation of a reinsurer might be needed

Question 21

What are product-specific control procedures that an insurer as stakeholder in LTCI can implement?

Answer 21

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

The insurer should allow prudently for possible extra claims outgo, if the regulators insist that benefits are enhanced beyond those intended by the insurer

Question 22

What are product-specific control procedures that an insurer as stakeholder in PMI can implement?

Answer 22

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

Question 23

What is the rate of medical costs inflation a function of?

Answer 23

• an ageing population of policyholders
• lack of sufficient supply of hospital beds or professional practitioners forcing up prices
• the move to newer and more expensive medical treatments
• a greater propensity of policyholders to claim following a perceived deterioration in State-provided healthcare
• increases in salaries of medical staff and the cost of equipment

Question 24

Regulator’s priorities

Answer 24

a) that insurers remain solvent

b) that consumers are considered in all decisions and that any disadvantages to consumers in terms of sales, admin and claim payments are minimised

Question 25

Regulator as a stakeholder

Answer 25

Insurers will be required to submit adequate and accurate reports to enable the regulator to assess the insurer’s integrity and solvency appropriately.

There may also be a requirement that premium increases are approved by regulator to protect consumers

The policy will be required to be clear and have no ambiguous wording, offer a range of benefits and represent reasonable value for money.

Sales processes will be monitored to ensure that an appropriate product is sold at the right level.

The appropriateness of target market will also be monitored