Chp 33-38 Flashcards
1) Definitions of cost and price
a) Cost – amount that should be theoretically charged for the benefits
b) Price – amount that can be charged for benefits under particular set of market conditions and may be more or less than the cost
2) Why “actual cost” may differ from “theoretical cost” of benefits and
a) Expenses, profit, taxation, commission, opportunity cost of any capital supporting the product, margins for contingencies, cost of options and guarantees, investment income, reinsurance costs, use of experience rating to adjust future premiums, basis that will be used to set future provisions for liabilities may be different form basis used to determine cost
3) why “actual price” differ from “actual cost”
a) Provider’s distribution system may enable it to sell above market price or to take advantage of economies of scale
b) There may only be a limited number of providers in the market and so higher premiums can be charged
c) Cheap product may attract customers to other, more profitable products of the company
4) Definitions of six methods of financing benefits (five methods of funding plus pay-as-you-go)
a) Single premium
b) Regular contributions
c) Terminal funding
d) Just-in-time funding
e) Repartition – funds that are set up to smooth costs under pay-as-you-go approach
5) Principles underlying the determination of discontinuance benefits for individual policyholders in life insurance
a) Amount offered on discontinuance should be fair to
i) Policyholder or scheme member
ii) Other policyholders and scheme members
iii) Provider of benefits
b) Discontinuance terms may be governed by
i) Market practice
ii) Regulatory requirements
iii) Difficulty of assessing suitable terms
c) They can take form of
i) Lump sum
ii) Paid-up status with no more premiums payable
a) Amount offered on discontinuance should be fair to
i) Policyholder or scheme member
ii) Other policyholders and scheme members
iii) Provider of benefits
b) Discontinuance terms may be governed by
i) Market practice
ii) Regulatory requirements
iii) Difficulty of assessing suitable terms
c) Discontinuance can take form of
i) Lump sum
ii) Paid-up status with no more premiums payable
6) Principles underlying determination of discontinuance benefits for individual members in benefit schemes and for entire benefit schemes
a) Equitable between members who leave and members of the scheme
b) Where assets available to provide benefits are insufficient, payment to members leaving may be reduced to reflect this, or the members can choose not to transfer benefits away but retain full discontinuance benefits in the scheme.
7) Reasons why insurance companies rarely become insolvent
a) Subject to state regulation – need to maintain solvency capital, reporting requirements
8) Actions that insurance companies can take to improve their solvency position
a) Close to new business – Save initial costs and free up capital
b) Establish a recovery plan
c) Insurer may be sold or to merge with another provider who takes on the liabilities
9) Factors to consider on the discontinuance of a benefit scheme, e.g. rights and expectations of beneficiaries, funding level, priority ordering
a) Rights of beneficiaries – depend on term under which scheme operates and any overriding legislation
b) Expectations of beneficiaries – likely to be benefits that would have been available had the scheme not discontinued
c) Funding level – accrued benefits may be reduced if there are insufficient assets
d) Priority ordering – legislation or scheme rules may indicate which types of benefits are to be reduced or which types of beneficiaries are to have their benefit reduced, if there is a fund surplus length of membership may be used to distribute surplus
10) Options that exist for the provision of benefits on discontinuance of a scheme and their pros/cons
a) Continuation of scheme without any further accrual of liabilities
b) Transfer of liabilities to another scheme with the same sponsor
c) Transfer of funds to beneficiary to extinguish liability
d) Transfer of funds to insurance company to invest and to provide benefit
11) Definition of “provisions”
a) Calculated amounts that need to be set aside to meet provider’s future liabilities
12) Definition of “best estimate” basis and why different best estimate bases arise
a) Best estimate of future experience by an actuary applying his/her judgement
b) Different best estimates arise because the estimates are subjective from actuary to actuary
13) Reasons why bases other than best estimate might be used
a) The reason for the valuation
b) Needs of the client
c) Requirements of legislative or regulatory authority
14) How to build in caution to a valuation basis
a) Use alternative scenarios
b) Incorporate margin of safety
c) Use basis stronger than the best estimate basis
15) Influence of following parties on basis used: Regulator Individuals Shareholders Trustees
a) Regulator – want realistic picture of provider’s finances, may intentionally understate financial strength of provider
b) Individuals – customers want values that take account of their individual circumstances
c) Shareholders – want to see actuary’s best estimate of future experience in the company’s accounts
d) Trustees – want the safety and certainty of their future benefits
16) Factors influencing the bases used for: Accounts Regulatory purposes Liability transfers Investment decisions
a) Accounts – shareholders/public expectations with no overstating or understating of assumptions
b) Regulatory purposes – demonstrate financial strength of provider
c) Liability transfers – acquirer will demand stronger estimate of liabilities to build in margin of safety, also influenced by relative power of the parties
d) Investment decisions – liability valuation will need to be realistic so that appropriate investment decisions can be made
17) Nine reasons for calculating individual provisions
Solvency demonstration
Internal management
M & A
Published accounts
Likely future contribution to a benefit scheme
Excess of assets over liabilities
Value benefit improvements for a benefit scheme
Influence investment strategy
Discontinuance/surrender benefits
18) Items for which global provisions would be established and why
a) Additional provision necessary to cover risks from any mismatching of assets and liabilities
b) 50% probability of under-provision created by using best estimate assumptions may be considered too great by trustees
c) Structure of scheme membership – e.g. scheme closed to new members must cautiously measure future new contributions
19) Issues to consider when valuing options
a) Options will move in and out of money over time depending on market conditions
b) Some option holders may fail to exercise an in the money options and others may exercise an out of the money option
c) Assuming that highest options is always exercised may build too much caution into valuation and may therefore have a too high cost
d) Risk of selection against the provider – guarded by setting eligibility criteria for the option or by setting terms that favour one option another
e) Assumptions used for option pricing depends on
i) State of the economy
ii) Demographic factors such as age, health, employment status
iii) Cultural bias
iv) Consumer sophistication
20) Issues to consider when valuing guarantees
a) Not productive to make unnecessarily large provision for worst case scenario for every contract, but best valued by stochastic approach taking class of business as a whole
b) Value of guarantees and their influences on consumer behaviour will vary widely according to the economic scenarios and the sophistication of the market
