Contract Factors Flashcards
Customer needs
- Consider whether contract meets needs of target market
- Risk appetite, benefits desired (core/ additional), capacity to pay for insurance
- Current/ future; logical/emotional
- Flexibility (benefit and premium, amount and timing)
Marketability
• Additional benefits and innovative products enhance marketability
• Flexibility = marketability
• Guarantees should enhance marketability
• Guarantee too complex = contract more difficult to understand = less marketable
• Consider whether expected sales volumes will be sufficient for the company to make an adequate contribution to fixed expenses and profits
o Rider benefits as opposed to stand alone contract= greater volume sold (easier to see “optional extra” than completely new product)
• Min/ max prem/cont/benefit = reduced marketability (restrictive for low/high earners)
• Weak discontinuance terms = reduced marketability
• Potential prizes increase marketability but must involve reasonable chance of winning
• Low charges and transparency increase marketability
Competitiveness
- Premiums charged shouldn’t depart too far from competitors for equivalent product
- Difficult to compare innovative product or additional benefits
- Consider likely response of competitors to introduction of product
- Consider success of similar products from competitors
- Consider sales method
Profitability
- Cover expected claims and expenses, meet profit criterion
- May conflict with marketability and competitiveness
- Minimum premium/ contribution ensures policies make a minimum contribution to fixed expenses
- Lapse assumptions may be important when considering profitability
Risk appetite
- Key risks of product must be identified and quantified
- Range of cover = catering for different consumer risk appetites
- Risk acceptable to insurer depends on ability/willingness to absorb or reinsure risk
- Optional benefits = anti selection risk
- New contract = greater risk as company has no past data or experience relating to this contract (uncertainty around setting assumptions due to parameter error)
- Offering contract in unit linked form will avoid a long term guarantee
Extent of cross subsidies
- Risk = mix of business being different to expected
- Avoiding cross subsidies may conflict with simple premium structure and admin
- Core/ additional benefits; Large/small policies; New business/renewals; Lapsing/remaining policies
Level and form of benefits
- Full claim amount or fixed %/ amount of each claim
* Apply excess to each claim
Contract terms and conditions
- Too tight= reduced marketability
- Too loose = unanticipated claims
- Advice from lawyers, reinsurers and relevant experts
Consistency with other contracts
- Premiums/ benefits fairly consistent with existing products to avoid discontentment from existing policyholders
- Pricing and design should be consistent with other products to reduce admin requirements
- Major change = significant systems development (costs time and money)
Admin systems
• If existing admin system can’t cope with complexity, product will have to be simplified/ modified or new admin system will need to be built/bought (may be costly)
• Consider how to minimise costs and load appropriately in the premium
• Increased admin complexity:
o Frequent premiums/ contributions
o Option to lapse
o Any prizes
• More complex= greater risk of error (op risk)
Financing requirements
- Consider new business strain
- Design to minimise capital requirements
- Pay regular commission payments over a period of time rather than lump sum at outset
- Additional capital needed to cover any guarantees
- Annuities – consider lower initial annuity and max increase if guarantees are involved
- Consider term of product and size of fund build up
- Payout linked to contributions = lower financing requirement
- Financing reqs lower for Unit Linked contracts due to lower benefit guarantees offered and ability to vary charges
Premium pattern
- Need to decide on premium frequency (annually, monthly, etc.)
- Consumer flexibility = more marketable but more complex to administer
Stat/ reg requirements
- Take into account any stat/ reg requirements on contract design or premiuns that can be charged
- Consider solvency requirements
Accounting implications
• Consider effect that new product has on accounting requirements.
Onerousness of guarantees/options
• Need to assess likely cost of guarantee, a stochastic model is likely to be most suitable
• Consider whether to use derivatives of replicating basket of assets to match index (if guarantee is index linked)
• Option to withdraw
• Need to be charged for through increase in premium of reduction in benefit
o Not charging through premiums will increase sales but result in adverse reaction when benefits are unexpectedly reduced
