F_Extras Flashcards
Large mutual, mainly with profits business - reinsurance needed?
- High level of free assets
- With mainly with profits written , the insurer has the ability to absorb high mortality risk and new business strain financing can be done from their own resources
o E.g. mortality fluctuations reserve, free assets or decreasing bonuses - Risk premium reinsurance without financing commission and relatively high M
o Protects bonuses from mortality risk
o Financial strength implies no need for financing (additional financing) - Catastrophe cover will also be needed
Large pty limited, rapid expansion, declining free assets - reinsurance needed?
- Reinsurance required must reduce the financing requirement
- Finre is based on the large portfolio size (in force book)
- Risk premium reinsurance with financing commission with M set to reduce new business strain but not give away large profit
- Catastrophe cover also needed since free asses are reducing
- Reinsurance helps reduce capital requirement and increases insurers return on capital
o Stop loss reinsurance
o Assumption swap
Here the reinsurer pays the insurer the difference between A&E if A>E
New unit linked company, limited capital resources- reinsurance needed?
- Low retention limit needed
- Reduced new business strain needed
o Insurer is then empowered to grow faster and reach critical mass without the financial limitations of its own capital - It needs to build up capital base through retained income
o Use risk premium reinsurance
o Original terms not the norm as reinsurer cannot match the investment returns
o Investment risk already passed from the insurer to the e policyholder
Thus no need to reinsure this risk - Risk premium reinsurance is combined with financing commission in order to reduce new business strain
- Reinsurance can be
o Quota share
o Low retention individual surplus
o May include catastrophe cover
sources of medical health for health underwriting
o Questions on a proposal form completed by applicant
o Reports from medical doctors consulted by the applicant
o Medical examination done by a doctor or nurse
o Specialist medical tests
Why with-profits products?
It meets the needs of clients who want exposure to some risk but also need some security.
It also assists life companies to manage their risk and capital requirements better if they can manage the extent of deferral of bonus and hence the size of the guarantees that they need to keep capital for.
Proportional vs. Non-Proportional reinsurance
- Proportional: Quota Share and Surplus
- Non-proportional: XoL
- Catastrophe and Stop Loss main types of XoL
Reinsurance Examples
1. Established mutual company with mainly with-profits business
If high free assets:
- can absorb mortality risk and finance new business strain from own resources;
- will want high retention to avoid giving away too much profit;
- original terms unlikely as reinsurer will need to match bonus rates;
- likely to have risk premium,
- no financing commission with high retention (lower if low free assets);
- even if need for reinsurance is low,
- might need help setting premium rates and for pricing of special risks; catastrophe cover may be required.
Setting Assumptions General Framework
- Analyse historic experience.
- Adjust for trends and expected differences in future experience & product structure.
- Add margins for uncertainty, adjusting for credibility of data.
Margins - assumptions
- should be allowed for to manage the risk of adverse differences in actual experience compared to the best estimate assumptions.
- If using a cash-flow model, margins may be allowed for in the RDR, using a stochastic approach or by adding a margin to expected values.
- If using a formula approach, only the third option above is suitable, judgment is needed
Factors in product design
Profitability
Premiums should cover claims, expenses and provide a profit margin.
What basis are units prices if a net seller of units? What does that mean for the bid/offer price?
Bid basis
Find bid and offer using expropriation price
If company a net seller, what basis will it use, what’s the formula for offer price and bid price.
What about if it’s a net buyer?
Bid basis: Offer price: (buying) Expropriation price PLUS initial charge (bid-offer) Bid Price (selling) Expropriation price
Offer basis: Offer price: (buying) Appropriation price plus initial charge (bid-offer) Bid Price (selling) Appropriation price
Explain what actuarial fund does?
Allows us to hold the present value of the unit fund
Explain the actuarial funding factor formula?
Unit fund at t * A(x+t:n-t)
ie. PV of current unit fund paid at death
T=0 normally
What formula shows the amount transferred to non-unit fund using actuarial funding
UF(0)*(1-A(x:n)) is transferred to the unit fund
ie. Difference between original unit fund and the PV of it
