Chapter 7 Product design and stakeholder interests (2) - Other stakeholder interests

Question 1

Stakeholders

Give a list of the important stakeholders we consider during product design (6)

Answer 1

• Customers (and their needs; covered in previous chapter)
• Insurers
• Other internal parties
• Regulators
• Distributors
• Other external parties eg actuarial profession

In this chapter, we focus on the stakeholders in bold

Question 2

Insurer stakeholder: general

What are the primary interests of the insurer (in relation to the contract design process), and in general? (3)

Answer 2

• The insurer is primarily concerned with
  
  • profit and
  • control of the risk management process
• Product design will be an iterative process, that has various stages to be considered

Question 3

Insurer stakeholder: key considerations in product design

What key factors is the insurer concerned with during the contract design process? (13)

Answer 3

1. customer acceptability
2. regulator requirements
3. distribution channels and their needs
4. competitiveness (price)
5. adequate profitability
6. company culture in product style
7. systems and other internal constraints
8. underwriting methodology
9. risk pricing
10. financing requirements
11. extent of cross-subsidies
12. onerousnes and cost of offering guarantees
13. premium/benefit change at renewal/review

Question 4

Insurer stakeholder: customer acceptability

From the insurer’s POV, in terms of considering ‘customer acceptability’ during the product design process:

Give an overaching objective which should be met (1)

What should the product be clear about? (2)

Comments on the benefits offered (4)

Comment on the understandability of the product (2)

Answer 4

Product should be designed to meet customer needs

Product must be clear about

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

Benefits

• The perceived value of benefits must by justified by the price charged by the insurer
• Benefits must be attractive to the customer eg through
  
  • innovative features
  • options and guarantees

Product must also be understandable to

• market
• distribution channel

Question 5

Insurer stakeholder: regulatory requirements

What impact does regulation play on product design? (4)

Answer 5

Regulator may have requirements on product design eg

• in some territories, before launch of a new product, the regulator must approve
  
  • new contracts
  • premiums/charging structure (to prevent customer abuse)

Question 6

Insurer stakeholder: needs of distributors

What different distribution channels may insurers use to distribute their products? (4)

What is the key theme to consider in relation to distribution channels when designing products? (1)

Discuss collaboration during product design in terms of

• working with distribution channels (1)
• sales consultants during (3)

Discuss how product design should consider how to inventivise sales once the product has launched (2)

Answer 6

Different distribution channels

• insurance intermediaries, tied agents, own sales force, direct marketing)

Key theme regarding product design/distribution channels:

• product should be capable of being sold via normal sales methods used by the insurer

Collaboration with distribution system is essential

• should involve distribution representatives + sales and marketing teams in early in design of products => give insight into customer needs.
• involvement in training sales consultants about product features, commission and clawback, scope for premium review

Once the product has launched, sales can be incentivised by

• having sufficient sales incentive to encourage distribution
• being priced to attracte customers and retain sufficient margins to provide return on capital

Question 7

Insurer stakeholder: price competitiveness

How should the insurer factor this aspect into the product design process? (4)

Answer 7

• The insurer should ensure that the product is competitive in terms of the following, and doesn’t overly deviate too far from competitors
  
  • structure,
  • charges and,
  • premium

Question 8

Insurer stakeholder: adequate profitability/RoE

How should the insurer incorporate profitability and return on equity (RoE) into the product design process? (3)

Answer 8

• sufficient margins should be retained and balanced with the need for competitiveness compared to prices in the market
• premiums should cover profits + expenses + claims
• profit = amount sold * profit margin per policy

Question 9

Insurer stakeholder: company culture and consistency with other products

In what way should the insurer consider company culture and consistency with other products during the product design process? (5)

Answer 9

• it is important for the insurer to consider consistency with other products when designing new products
• company may wish to ensure the charging and benefit structure of new products/policies are at least similar to existing business
• major changes may lead to the need to further develop existing systems, which incurs costs, and may lead to delays
• material inconsistency with other products may lead to excessive attractiveness of new products, which may upset existing customers, this could creat risk of
  
  • lapse and re-entry risk
  • cannibilisation

Question 10

Insurer stakeholder: systems and other internal constraints

How does the insurer’s systems and other internal contraints influence product design? (8)

Answer 10

Actuary must be aware of system implications when coming up with a new product as there may be constraints.

The key considerations are:

1. systems must record of process of insurance
2. provide info to enable profit assessements
3. new products may require systems reorganisation
4. any launch may require reappraisal of priorities
5. expenses relating to system changes must be included in product costing
6. time must be allowed for dev and testing
7. communication with key system decision maker

Admin systems

• system requirements of a product may limit either benefits or charging structure to be adopted.

Question 11

Insurer stakeholder: systems and other internal constraints, data capture and IT infrastructure abilities

Insurers should consider the impact and capabilities of its system infrastructure when designing new products.

Give examples of what data capture may be useful for by the insruer (3)

What functions would we expect the insurer’s systems to be capable of performing? (6)

Answer 11

Data capture by IT infrastructure is crucial for:

• administration of policies
• experience monitoring
• re-pricing

Information technology must:

• record all processes of insurance
• capture individual policy details at inception and link this to claims info as it unfolds
• combine policy and claims info to monitor profitability
• group by risk characteristics
• be able to add external data
• be able to model and project cashflows (including other aspects of company cashflow)

Question 12

Insurer stakeholder: underwriting methodology

Comment on the role that medical underwriting plays in product design (3)

In what cases is the consideration for underwriting more important? (4)

Comment on the use of claims underwriting (6)

Answer 12

Medical underwriting is a very significant aspect of contract design

• heavily influences premiums charged and policy conditions eg exclusion of pre-existing conditions…
• …this in turn influences design, pricing and systems

Importance of underwriting

• more important for long-term policies with guarantees (ppremiums/benefits/term)
  
  • if insurer is obliged to review, cannot exclude poor claims record, so must underwrite well
• on year policies can’t spread expenses over as long a term so pressure to lessen initial underwriting
  
  • may use moratorium underwriting (ie using medical evidence only at point of claim)

Claims underwriting and procedures

• should be consistent with
  
  • pricing assumptions, and
  • underwriting used to accept a policy at inception
• should match policyholder expectations re time length/info required
• should be consistent with competitors to avoid anti-selection (on insurer with weakest claim requirements)

Question 13

Insurer stakeholder: risk pricing

What do we mean by risk pricing, and how must this be considered in the product design process? (2)

What items must be clear in terms of the offering being provided by the insurer via product design, and what does framework does this clarity lend itself to? (4)

Comment on the need to estimate benefit outgo during the contract design process and how issues surrounding this feed into the contract design process (3)

Answer 13

Risk pricing refers to accurately assessing and pricing for risk.

• insurer should use sufficient statistical methods/data to price risks accordingly

Insurer’s product offering/legal conditions must be clear to provide adquate framework for:

• statistical costing
• predicting future outgo
• preventing anti-selection and moral hazard

Actuary attempts to estimate benefit outgo from contact design from statistics.

• data availability varies by location and product
• reinsurer assistance can be key for data and contract design

Question 14

Insurer stakeholder: risk characteristics

Comment on the influence of risk characteristics during the product design process (3)

Comment on the influence and use of reinsurance in terms of how it feeds into the contract design process (2), in what ways may an insurer obtain help from reinsurance (5)

Answer 14

Insurer must consider acceptable level of risk associated with proposed contract design.

• This depends on the company’s ability to absorb risk or reinsure risk
• The risk should be within the insurer’s risk appetite if it is above the reinsurer excess risk

Reinsurance

• decision to reinsure will be part of pricing process, eg may influence policy limits
• inexperienced insurer may rely heavily on reinsurer for
  
  • contract design
  • legal causes
  • needs of regulators
  • pricing implications and data
  • training/resourcing

Question 15

Insurer stakeholder: financing requirement

Discuss how the financing requirement feeds into the product desing process from an insurer’s POV (2)

Give two examples which influence capital requirements for product design (4)

Answer 15

Unless company has substantial resources/capital, insurer will aim to minimise financing requirements, and prefer products which do not require much capital

Examples of elements which influence capital requirements

• Product structure:
  
  • unit-linked products reduce financing requirements
  • flexibility to adjust design (vary nil-alocation period)
• Guarantees have a big influence on the reserves that need to be established, hence capital requirements

Question 16

Insurer stakeholder: cross-subsidies and equity

In what ways migth cross subsidies influence the product design process for an insurer (4)

Give examples of cross subsidies which may arise and what additional considerations these may lead to (3)

Comment on the extent to which cross subsidies will be allowed in the product design process (3)

Answer 16

Cross subsidies consideration

• Product design will involve combining risks and averaging premiums out
• It’s important
  
  • to align price to current market processes
  • that product also matches needs as individually as possible, and that profitability assessed on homogenous risk cells

Examples of cross subsidies

• for certain product lines to sell it may be necessary to spread expense contributions across product lines
• actuary should ensure rights of different classes of policyholder to security of benefit are not diminished by cross-subsidies.
  
  • Rights includes bonuses of with-profit contracts.

Company needs to decide on the extent of any cross-subsidies e.g.

• between large/small contracts; single/regular premium
• marketing advantage of a simple premium may conflict with desire to avoid cross subsidies

Question 17

Insurer stakeholder: cost of guarantees

Answer 17

Offering guarantees results in two problems

• possibly having to suffer cost that you did not fully expect
• probably having to reserve for this possibility from the outset - increasing capital strain

Question 18

Insurer stakeholder: guidelines to consider in offering guarantees

Briefly touch on the guidlines the insurer should consider during the product design process, when deciding on whether to offer guarantees or not (7)

Answer 18

• ensure there is a customer need for the guarantee
• price the gaurantee as accurately as possibly
• ensure adequate reserves are in place for the guarantee
• the cost of capital to support the gaurantee should be charged to the product
• obtain sound reinsurance (and charge its cost to the product, as with cost of capital required)
• ensure that marketing and other policy literature is clear
• ensure sales process explains the guarantee clearly

Question 19

Insurer stakeholder: premium or benefit change on renewal or review

During the product design process, describe how the insurer the insurer should consider the extent to which premiums or benefits can be changed during product renewal or review

Answer 19

• A large measure of insurer control under healthcare is usually at renewal/review.
• At this stage an insurer will compare past experience to that expected.
• Results of this analysis and variations will determine extent to which premiums and benefit will be changed.
  
  • where analysis indicates benefits must be reduced/premiums increased insurer must be wary of resultant selective lapsing.
  • compare to what competitors are doing.

Question 20

Conflicts between product design factors

Briefly explain how conflicts may arise with the various factors considered so far during the contract design process (2)

Answer 20

• The design factors are not independent of each other.
• Meeting the one may prejudice meeting the other, so a compromise must be struck.

Question 21

Insurer as a stakeholder: CI insurance, standard CI

For standard CI contracts, describe how the nature of the contract leads to specific considerations that the insurer must account for in the product design process.

Consider

Key customer behaviours that the insurer should guard against (5)

Paying out claims on standalone contracts (3)

Importance of sufficent reserves and why they may be needed (4)

Managin expectations (4)

Answer 21

• Insurer must be on guard against anti-selection, moral hazard and non-disclosure through underwriting and claims process
• For standalone contracts, insurer should also avoid paying out unnecessarily on death since this is not priced into policy.
  
  • Can use a survival period for this eg 28 days.
• A sufficient reserve is required for late notified claims (up to 10 years after original incidence)
  
  • can use a notification period for this eg only within 2 years of illness
• Need to manage expectations when new diseases are discovered.
  
  • Risky to include at little or no extra cost.
  • Must properly cost and estimate.
  • Also consider impact of guaranteed insurability options

Question 22

Insurer as a stakeholder: CI insurance, tiered benefit CI, overview

For tiered benefit CI contracts, describe how the nature of the contract leads to specific considerations that the insurer must account for in the product design process.

Answer 22

• It is difficult to set additional stages of diseases that trigger both legally and medically objective while being considerate to the consumer.
• Weaknesses in definitions could lead to more claims even if probabilities are as anticipated.

Question 23

Insurer as a stakeholder: CI insurance, tiered benefit CI, pricing

For tiered benefit CI contracts, describe how the nature of the contract leads to considerations that the insurer must account for in the product design process, specifically relating to pricing of these tiered benefit CI insurance contracts

Consider:

Data issues (4)

Overlaps between diseases (2)

What actuaries pricing such products are likely to prefer in product design (3)

Answer 23

Data issues

• Fnding data/statistics for current definitions is difficult enough, with historic insurance experience being limited.
• having to find 4 times as many severity levels and transition probabilities (possibly age-based and gender-based) will be extremely challenging with any degree of accuracy.
• large margins required may make product too expensive
• underlying incidence and transition rates may change in future before credible data is collected

Overlaps between diseases

• there will be many overlaps between related ilnesses that will make pricing more complex and product confusing
• cross correlation of diesease allows scope for disallowed claims and customer dissatisfaction

Actuary faced with these risks is likely to prefer

• no guarantees
• significant margins in assumptions and
• co-operation with a knowledgeable reinsurer

Question 24

Insurer as a stakeholder: CI insurance, tiered benefit CI, underwriting

For tiered benefit CI contracts, describe how the nature of the contract leads to considerations that the insurer must account for in the product design process, specifically relating to underwriting of these tiered benefit CI insurance contracts.

Consider:

Implication of tiered benefits for claims experience and how this relates to underwriting (2)

Impact on the claims manager (2)

Influence of the market (3)

Answer 24

• Bringing forward potential claims situations increases importance of pre-existing conditions and material non-disclosures.
• Initial underwriting may have to be more stringent and this requires time and money.
• Claims manager will be faced with more claims forms with more complex definitions and policyholder pressure.
• More expertise will be needed.
• Poor underwriting may lead to bad press
• Market may not have a consistent approach to underwriting, and judgment may be applied in accepting claims.
  *

Question 25

Insurer as a stakeholder: LTCI

For LTCI contracts, describe how the nature of the contract leads to specific considerations that the insurer must account for in the product design process.

Consider

Impact of how socierty views wellbeing of elderly and how consumers may view LCTI products (2)

Impact of the State (2)

Impact of regulator (2)

Answer 25

• Wellbeing of elderly is a politically sensitive issue.
• Policyholder may interpret policy as care instead of cash.
• Insurer needs to have flexible contract design and provision of benefits such that changes in State attitude to LTC will not cause losses that weren’t accounted for
• The insurer should always keep aware of such developments
• In addition, regulator interpretation may warrant additional payments.
• This motivates for the need to use margins to protect against adverse experience from these events

Question 26

Insurer as a stakeholder : Private Medical insurance

For PMI contracts, describe how the nature of the contract leads to specific considerations that the insurer must account for in the product design process.

Consider

How much price control the insurer has (5)

Measures the insurer may take to control prices/costs (5)

The impact of medical inflation (2)

Answer 26

Extent of price control the insurer has

• For PMI, insurer has greater level of pricing control, as contracts are short-term and re-priced annually
• However, insurer doesn’t have complete control over the benefit payouts since these are usually indemnity based (maybe subject to limits) and/or paid to 3rd parties (like hospitals), and these 3rd parties choose the fees

Price control measures

• Insurer can negotiate fees to an extent; more possible with larger insurer. But ultimately patient choses treatment where they want (subject to limits), restricting ability to control.
• An insurer can require approval of treatment before care is given; however, this may be seen to infringe freedom or be unattractive.
• Cost of reimbursement can be discussed prior to treatment.

Impact of medical inflation

• In most countries, medical inflation increases at greater rate than CPI (which consumers are actually familiar with).
• This makes it difficult to convince consumers of the need for annual price increases.

Question 27

The rate of medical inflation is a function of the following (5)

Answer 27

-an ageing population -lack of sufficient supply of hospital bends or medical practitioners pushing up prices. -move to newer and more expensive treatments or drugs -greater propensity for policyholders to claim following a perceived deterioration in state facilities. - increases in medical staff salaries.

Question 28

Regulator stakeholder: priorities

What are the main priorities that regulators aim to achieve? (4)

Answer 28

The regulator’s main priorities are:

• that insurers remain solvent
• that consumers are considered in all decisions
• that any disadvantage to policyholders is eradicated totally (sales, admin, claims)
• to ensure that insurers regularly submit adequate and accurate reports to monitor intergity and solvency appropriately

Question 29

Regulator stakeholder

In addition to its main priorities, what else will regulators want to achieve? (4)

Answer 29

Regulator will want the following

• Regulator will want clear/unambiguous policy wording and range of benefits that customer expects. Particular danger areas are CI and LTC products
• Regulator will want to ensure consumers are not misled, that polices are reasonable value
• Regulator will monitor sales, customer needs, ability to pay, undue sales practices, insurer promises and policy conditions
• In some countries regulator may require premium increases on health contracts to be approved

Question 30

Stakeholders: professional guidance

Describe the influence of professional guidance on the product design process (3)

Answer 30

Professional guidance

• when designing and pricing products the actuary must comply with any professional (actuarial) guidance that is applicable to the territory of the operation
• this factor is important in terms of both
  
  • the actuarial body to which the actuary belongs to, and
  • the body presiding over the territory which the actuary exercises their judgment