F102 Summaries P1 Flashcards
product cycle elements
- product design
- pricing
- marketing and sales
- underwriting
- claims management
- experience monitoring
- valuation
main risks to endowment assurances
investment returns
expenses
withdrawals, especially when the asset share is negative
mortality, including anti-selection risk
capital requirements of the business depend on
contract design
premium payment frequency - single vs regular
the relationship between the pricing and supervisory reserving bases
the additional solvency capital requirements - legislation
the level of initial expenses
issues that cause confusion for IP policies
- the definition of incapacity and the measures of fitness to work are not always open to objective assessment
- payouts are not always linked to current salary
- it may be necessary to apply benefit limits
- underwriting can be complex - due to occupation or past medical history
- there may be exclusions
what are the different ways in which IP benefits can vary
benefits can:
- increase at a specified rate from the start of the policy (with corresponding increase in premiums)
- increase at a specified rate during any period for which benefits are payable
- be paid at a reduced rate if the insured returns to work part time or works with a reduced salary
- be subject to a deferred period at the start of each period of incapacity
- be subject to linked claims period
- be increased without further evidence of health due to life events. e.g. new child
examples of occupational definitions under IP
- inability to perform own occupation
- inability to perform own occupation and any other suited occupation by education, status or training
- inability to perform own occupation for an initial period of claim followed by inability to perform any occupation thereafter
- inability to perform any occupation.
what are the alternatives to occupational definition under IP
functional assessment tests
activities of daily living
activities of daily working
personal capability assessment (mental health)
IP products include the following risks to the insurer
- claim inception and termination rates, including anti selection
- selective and normal withdrawals
- to a lesser extent, mortality, expenses and investment
- capital requirements will normally be low
standalone CI
where the sum insured is only paid on the diagnosis of an insured condition. no payment is made on death. the insurer may impose a survival period on standalone policies to distinguish between a critical illness event and death.
CI rider to life policy
where the sum insured relating to CI is paid on the diagnosis of the CI and the sum insured amount relating to the death benefit is paid on the death of the life assured. (2 possible payments)
accelerated CI
where the sum insured is paid on the diagnosis of an insured condition or death, whichever occurs first.
needs met by CI policies
- income can be provided when the individual cannot work as a result of a CI
- the benefit can be used to repay a mortgage or other loan
- medical costs can be funded when the CI requires surgery or treatment
- business partners can purchase CI on each other in order to fund the buyout of the stake in the partnership
- it can fund a change of lifestyle in order to improve the claimants health
- other
- recuperation after illness
- taxation planning
- medical aids - installation of specialist equipment in the home
criteria for inclusion of illness under CI
- it is a condition perceived by the public to be serious and occur frequently
- each condition covered can be defined clearly so that there is no ambiguity at the time of claim
- sufficient data is available to price the benefit
needs met by tiered CI
- benefits are a closer fit possibly to medical distress and financial needs
- benefits may be deemed more comprehensive and more fair than the traditional CI
cons of tiered CI
- a tiered benefits product is more complex than a standard CI contract, making it hard to compare across providers.
- there is potential for higher degree of claims disputes
main risks of CI to insurer
- diagnosis rates, including anti-selection
- selective and normal withdrawals
- expenses, and to a lesser extent, investment risk
- capital requirements will normally be low
costs of LTCI can be divided into
- living costs
- housing costs
- cost of personal care
we are concerned with the additional costs that result from deteriorating health, not the total cost
LTCI risks to the insurer
- claim inception and transfer probabilities, including anti- selection
- investment and expenses
- selective and normal withdrawals
marketing risk
capital requirements could be extensive
the basis for a valuation should reflect
- expected future experience
- margins to ensure adequacy of reserves
- legislation / regulation for published reserves
- the need for consistency
the basis for a valuation will depend on whether the accounts are to be published or are only for internal use.
any published accounts may be subject to legislative constraints, regarding, in particular
- whether a going concern or break up basis is to be used
- whether the accounts have to be true and fair
- whether assumptions should be best estimate or include margins
purpose of the valuation: published vs internal vs supervisory
published valuations for the purpose of demonstrating solvency may be subject to different rules from those governing other kinds of published accounts.
internal accounts are usually based on best estimate assumptions.
supervisory reserves, especially for solvency purposes, may require prudential margins or may be calculated using a market consistent approach.
reserving assumptions vs pricing assumptions
it is common in some countries to price prudently and then to define the reserving basis as the pricing basis.
this may be suitable for wp business as it can allow profit to emerge gradually and appropriately to the distribution method. it is less appropriate for wop business.
in other countries premiums may be calculated using broadly best estimate assumptions and allowing for risk through the rdr. in this case the pricing assumptions cannot be used if the regulations require prudent reaserving assumptions
what is embedded value
embedded value is the present value of the shareholder profits in respect of the existing business of a company, including the release of shareholder owned net assets.
how is ev calculated
it can be calculated as the sum of
- the shareholder owned share of net assets, where net assets are defined as the excess of assets held over those required to meet liabilities
- the present value of future shareholder profits arsing on existing business
for conventional without profits business the value of the shareholder profits may be calculated as follows
he present value of future premiums plus investment income less claims and expense, plus the release of solvency reserves
for unit linked profits business the value of the shareholder profits may be calculated as follows
the present value of future charges including surrender penalties less expenses and benefits in excess of the unit fund, plus investment income earned on and the release of any non unit reserves
for with profits business the value of the shareholder profits may be calculated as follows
the present value of suture shareholder transfers e.g. as generated by bonus declarations.
what is the appraisal value
the appraisal value is the sum of the ev and the goodwill (the estimated profit from future business). the appraisal value maybe used when an insurance company is to be sold.
setting an embedded value basis
the expected future experience is usually taken as best estimate, unless more prudence is needed for the particular purpose for which the accounts are required e.g. published accounts
risk can be allowed for by using a rdr that is higher than the rfr or by deducting a risk margin.
income protection multi state modelling
this is a superior tool for sensitivity testing
ph are separately tracked through the different states of
- healthy,
- sick within the deferred period,
- sick and claiming,
- dead and
- lapsed.
assumed forces of transition between states are used to project the probabilities of being in particular states at specific future times. these probabilities can then be used to value benefit and premium payments.
what is the problem with income protection multi state modelling
this can lead to many sub cohorts, subject to different assumed transition probabilities - this may lead to spurious accuracy. appropriate combinations of sub cohorts would be made, allowing fewer but more reliable transition probabilities to be used.
income protection - claim inception and disability annuity approach
cost of claims incepted in each future policy year - the expected claims cashflow- calculated from
survival probability * claim inception rate * disability annuity
producing mid year results
income protection pricing - claim inception and disability annuity approach FORMULA
survival probability * claim inception rate * disability annuity
income protection pricing - claim inception and disability annuity approach conditions
the disability annuity value is only for the current claims, ceasing on recovery, death or policy expiry. it is based on a double decrement table - decrements of death and recovery - for sick lives. the annuity value will vary depending on the duration of sickness at the start of claim payments (i.e. the deferred period)
what are the 3 variations of the claim inception rate pricing methods
- initial claim inception rate ix,d
- central claim inception rate (ia)x,d
- central claim inception rate (ib)x,d
initial claim inception rate ix,d
the probability of claim inceptions following deferred period d, occurring during the year of age (x,x+1) arising from sickness inceptions of healthy lives during the year of age (x-d, x+1-d). the relevant survival probability is the probability of being healthy at exact age x-d.
central claim inception rate (ia)x,d
the expected number of claim inceptions occurring over the year of age (x,x+1) following deferred period d, relative to the average number of lives (healthy and sick) alive during that year of age. the relevant survival probability is the probability of being alive at average age x+0.5
central claim inception rate (ib)x,d
the expected number of sickness inceptions occurring over the year of age (x,x+1) which ultimately become claim inceptions d years later, relative to the average number of lives (healthy and sick) alive during that year of age. the relevant survival probability is the probability of being alive at average age x+0.5
long term care insurance pricing
use multiple state or inception /annuity methods to value the benefits.
critical illness pricing
critical illness incidence rate is of the form
ix = ihd,x + is,x + ic,x + io,x
hd= heart disease
s = stroke
c=cancer
o=other
CI claim incidence rate is ix*probability of surviving the survival period
accelerated CI claim incidence rate is ix+ (1-kx)qx where kx is the proportion of deaths over 9x,x+1) that are due to critical illness.
CI claim incidence rate formula
ix*probability of surviving the survival period
accelerated CI claim incidence rate formula
ix+ (1-kx)qx where kx is the proportion of deaths over (x,x+1) that are due to critical illness.
