F_Extras 2 Flashcards
Factors in product design
Regulatory Requirements
Must adhere to regulatory requirement and keep abreast of potential changes.
Some factors are not independent and compromises are needed, e.g. between competitiveness and profitability.
Gross Premium Valuation (GPV)
PV of future Benefits +
PV of future Expenses -
PV of future Office Premiums =
GPV Reserve
Types of Reserves
Unit Reserve (UR) Non-Unit Reserve (NUR) Can be negative Negative allowed if UR + NUR > 0 Future profits emerge in time to repay Total NUR’s > 0
Features of GPV
Explicit allowance for expenses Premiums valued are office premiums Pricing vs valuation basis immediately emerges as profit/loss Initially reserves may be negative Sensitive to change in basis
Net Premium Valuation (NPV)
PV of future Benefits+
PV of future Net Premiums =
NPV Reserve
Net Premium = Premium required on valuation basis that will provide contractual benefits offered at start
Data Checks
Data Reconciliation
Consistency
Analysis of Surplus and Analysis of Embedded Value
Unusual Values and Spot Checks
Existing Business Profitability
EV techniques
Calculate present value of future profits at RDR
Whole book or suitable model points (scaled up)
Experience analysis
Analysis
Mortality
Withdrawal
Expense
Experience Analysis
Expenses: Process
Process
Determine expenses, subdivide, allocate proportionally, once-off considerations, exceptional expenses, reconcile
You are the statutory actuary of a small, new, life insurance company operating in a country with a developed life insurance market. Your company only writes conventional life insurance business. You are responsible for setting all of the assumptions for the valuation. The Managing Director is concerned about protecting the future profitability of the business, and in particular is concerned about the risk associated with inaccurate valuation assumptions.
Explain what you may be able to do (other than through the use of reinsurance) to remove as much of the risk associated with the possibility of the company’s actual experience differing from the valuation assumptions as possible, and what problems you might encounter in trying to do this. [10]
Investment return:
Investment return:
• Transfer the assumption risk to an outside party, e.g. by purchasing investments with guaranteed investment returns.
• If the company uses these for investments, you can fix the assumption to match the investment returns that are guaranteed and the risk around this assumption is removed.
• If the products have investment guarantees additional assumptions will be required, e.g. likelihood of guarantee biting.
• Investment guarantees could be removed from the product design where possible, e.g. selling with profit rather than non-profit products.
Problems:
• Investing in assets with guaranteed benefits may not provide the highest expected returns.
• It might not be possible to radically change product design in this way.
How to value an option or guarantee (2 ways)
Option pricing technique
Stochastic simulated investment performance
Give 3 common mortality options
Additional benefit purchase without need for further health evidence Renewable policy (no further health evidence) Convertible policy - change part of SA from one contract to another
Why use T’s and C’s for mortality options, explain what it means for premium rates
Reduce anti-selection
ie. Those in poor health using option to get large amounts of life insurance at rates not reflecting their condition
Give some T’s and C’s examples for mortality options
Timing - fixed take up times
Birth child
Salary increase
SA(additional)<=SA(original)
Explain the cost of a mortality option
Difference between price should have charged given full underwriting information and price actually charged
