Exam Technique Flashcards
Describe Reversionary Bonus
- Simple, Compound, Supercompound
- Will support equitable distribution across different generations of policyholders. Complex structure as different cohorts having different rates
- Create RBE, may not be sustainable
- Results in increase in guaranteed liability and higher capital requirements
- May encourage surrenders
- Shareholders get profit quicker than terminal
- Compound defers more than simple
Describe Terminal Bonus
- Aims to pay out asset share on maturity. Harder to ensure equity between different generations of policyholders. Asset shares can be used to fairly allocate bonuses.
- Method delays distribution to shareholders
- Bonuses not guaranteed: BSR or non-vested bonus can be used to absorb loses and reduce capital requirement
- No significant impact on RBEs
List Factors to take into account for bonus declaration
Free assets, level of BSR. Also consider increased capital requirements
Pooling and smoothing. In conflict with equity. Smoothing policy will have impact on vested/ Non-vested split and BSR, BSR/Non-vested can be used absorb loses
Asset shares, split of terminal vs regular, levels of guarantees.
Investment strategy-
BSR/ non-vested can be used as a management action to reduce investment capital requirements, deferring bonuses can allow a more aggressive investment strategy. Vested/ reversionary result in higher guaranteed liability and capital requirements
Consider rates offered by competitors. May want to use excess surplus to subsidise and attract new business
General
Any changes to investment mandate/PPFM need to be communicated to policyholders
Any RBEs which may be created need to be managed
Regulatory/ legal/TCF
Administration
Changes to MVA formula to discourage surrenders
Describe the Management of a Shrinking Bonus Fund
Shrinking Bonus Fund
Actions consistent with PRE, Marketing material, PPFM
Balance interests of shareholders and policyholders, discretion allowed not exceeded. Communication to clients
Risk is that bonuses become more volatile, smoothing works less with less policies.. Could result in zero bonuses for long period or even remaining clients becoming enriched.
If policyholders charged for capital, capital requirements and charges will increase.
Bonuses
Maintaning a high BSR acts as a cushion against adverse experience. Fund should then be closed to new business or new clients will be allowed to participate in large surpluses.
Bonus rates reviews more frequent to ensure assets are distributed fairly. When the last policy matures.
Non-vested bonuses may be increased at expense of vested. Should only consider if management would really consider removing or following a more aggressive investment strategy to benefit policyholders
Should not unduly penelise surrendering policies.
If investment strategy made more cautious, vested bonuses should increase and declare out existing BSR.
Investment Strategy
To reduce volatility of investments and bonuses company should consider investing in less risky assets. Effect on expected returns should not be excessive
This may reduce capital requirements and associated capital charges
Derivatives can be used to hedge against falls in equities.
As policies approach maturity, assets should be more invested for liquidity
Cashflow profile can be projected and matched more closely
Mortality
Can become more volatile, use reinsurance
Expenses
Decreasing economies of scale
Other
Merge with other funds
Rebrand/ relanunching to get more polices
Offer clients product conversion/ move to another fund
Reputational risks
List Reserves for with profits
GPV with allowance for future Discretionary + BSR + APN110 IGR Discretionary Rates: Should be supportable Consistent with PPFM and RBEs. Allow for management actions
Managing with Profits in low interest environment
Eg if charges for investment admin 1,5%, and premiums discounted at 6%, then investment return needs to exceed 7.5% before surplus emerges
In lower interest environment , expected returns are lo be lower.
Need to take into account RBEs and PPFM, also reputational risks. Commnication to policyholders
Solutions:
Change investment strategy to more matched, lower proportion in equities. Can use derivatives.
Conversion to another annuity option
Adjust bonus rates, to distribute BSR more slowly
Injection of funds from shareholders to BSR
Reduce Annuity charges.
List Product Design Factors to Consider in IP Question
- Claim/disability and Income Definitions eg ADLs
- Replacement Ratios
- Initial Underwriting
- Claims Management
- Waiting, Deferred, Linked period
- Rehabilitation Benefits
List the reserves to consider for a Group IP
• Claims in payment- prospective valuation for both Group and individual
*Need to consider claim inception and termination rates
• Individual Policy – Prospective reserve based on duration and premium size, may be zeroised
• Group products are usually one year cover, IBNR, UPR
• Claim expense reserve- admin and management of policies and claims
• Usually matched by bonds
During economic downturns, there is worsening of disability experience:
• Lower terminations due to less people returning to work or less work possibilities, increased Claims in Payment
• There could also be an increase in the number of claims and as retrenchments and down sizing occurs. Where premiums are guaranteed, this cannot be changed to immediately reflect this
• A deficiency reserve may need to be set up.
Describe the projection calculation for Group EV
For retrospective reserves calculate future profits and discount to present. Consider projection period, profit margin in risk premiums, premium growth due to salary growth. Terminations of schemes, RDR and tax on backing assets. A claims ratio based on past experience can be used to project claims, include reinsurance.
Also consider margins in prospective claims in payment
Explain why company experience could differ from industry for Income Protection
The company’s rating categories may be out of line with competitors. In that case, buyers of the product might tend to be those people who believe they are likely to claim and who might be rated by other offices.
Claims experience is impacted by inception and termination rates.
Underwriting standards may be different (lighter) than average. This would naturally lead to a higher claims rate.
Claims admission rules may be more generous than average. This would lead to higher claims inception rates.
Claims management may be less active than average. This would mean that claims termination rates are worse.
The replacement ratio (benefit relative to income) may be higher than average. (There is a correlation between replacement ratio and cost of claims, as the incentive to return to work reduces as the replacement ratio increases.)
The company may have a higher than average share, in its business, of those policies / policyholders whose claims experience is poor. This might be due to random fluctuations in experience, possibly exacerbated by possessing a small portfolio of this business, selective withdrawals of ‘good’ lives, or the target market including sales in a region suffering localised economic recession. (Mark for any other reasonable example.)
This could come about through features of the policy design that encourage antiselection. Features of a product which might encourage anti-selection include: • High replacement ratio. • Inclusion of a short waiting period. • Definition of disability.
Anti-selection in the form of withdrawals could result in higher claim inception ratios. The underlying experience may in fact not be different: the company (or industry) data may be inaccurate (unreliable). Alternatively, the industry data may not be sufficiently recent to be fully comparable
Guaranteed vs Reviewable Premiums
The company must make prudent assumptions about its future sickness experience, both inception and termination rates, as it cannot adjust future premiums to allow for worsening experience.
This is a particular problem with sickness rates, as past experience is not necessarily as good a guide to the future as in the case of mortality.
The risk of anti-selection can change over time. This could be due to changes in the economic environment or changes (deliberate or otherwise) in the target market.
It will also require prudent assumptions for expenses, particularly claims expenses, and the interest rate.
The guarantee increases the capital required to support the product. The extent to which a charge can be included in the premium for the cost of capital will determine the extent to which the feature influences the product’s return on capital.
List Points to include when answering an EV question
APN107 provides guidance on Embedded value reporting
EV = ANW + VIF – CORC
EV will change due to:
• Unwinding of RDR
• Value of new business added
• Experience Variances
• Modelling and basis changes
VIF represents release of margins for prospectively valued business and expected future profits discounted for retrospectively valued business
Need to clearly define covered business in EV calculation
Group EV = EV of covered business + fair value at non-covered business
For required capital, consider SCR and internal requirements
Excludes future new business
Allowance tax, including transfers from policyholder funds to shareholder funds
Change of EV assumptions, factors to consider
Should be best estimate, consider past experience modified by future trends
Consider the length of time over which trend occurred: sustained period vs once off event
If data in experience analysis is sufficient and credible
Economic experience, reinsurers, industry data
Has the experience been impacted by a single large claim
For income protection, need to investigate whether due to higher inception or lower terminations
May not apply to all rating groups. Need to identify rating factors for the change is to be made
Consider change in policy conditions, underwriting and claims management.
Compare to competition and industry. Reinsurers advice
Impact of adding unit-linked liability of X to Balance Sheet and operating profit
Impact of adding unit-linked liability of X
Stautory solvency:
Assets increase by X
Liabilities:
Unit Reserve increase by X allowing for allocation rate
Non-Unit Reserve should be negative, may zeroise
• Reserve Would have to equal surrender value, or may need a surrender penalty
Operating Profit:
Consider:
Allocation rates, managements fees
Administration expenses
Valuation strain
Explain how to conduct an expense analysis
total expenses into those relating to initial, renewal and claims. Total expenses will not be known at the start, can use budget or inflate last year’s expenses with inflation.
Adjust for once off expenses and commission, Expenses for the year would not be known in advance, project these. An inflation adjustment may have to be made to adjust expenses as at valuation date.
Some departments will clearly fall into one category, time sheets can be used for others.
Overheads can be allocated pragmatically eg rent per floor space used
Per policy expenses then determined by dividing renewal expenses by inforce on average, initial by expected NB volumes
