Lists Flashcards
List
The factors that affect the level of capital requirements
There are 5
CLAPP
Contract desing
Level of intial expenses
Additional solvency capital requirements
Pricing and reserving bases relationship
Premium payment frequency
Aspects of insurance company management that affect its profitability and risk profile
DI CHEAP SUPRA
- Discontinuance terms offered
- Investment strategies
- Capital management
- HR management and remuneration
- Effectiveness of monitoring and feedback systems in reacting to events
- Approach to reserving and profit distribution
- Product design
- Selling and marketing
- Underwriting practices
- Pricing
- Reinsurance arrangements
- Administrative systems in place, data handling anf maintenance
Aspects to Consider
The General business environment
- Propensity of customers to purchase products
- Methods of sale
- remuneration of sales channels
- types of expenses and commissions, including influence of inflation
- economic environment
- legal environment
- regulatory contraints and opportunities
- fiscal contraints and opportunities
- professional guidance contraints and opportunities
Lists all the
Risks
3 Accronyms
AEIO + BCC
1. Counterparty risk
2. Investment performance risk
3. Business risk (CCOMME VW)
a. Competition
b. Options and guarantees
c. Mix of new business by nature/size of contract and by source
d. Mortality and morbidity rates
e. Expenses (including effect of inflation)
f. Volume of new business
g. Withdrawals
h. Claim experience for health care products
4. Operational risk (FAFA P)
a. Fraud
b. Actions of board of directors or staff
c. Failure of appropriate management systems and controls
d. Actions of distributors
e. Policy and other data
5. External risk
a. Legal, regulatory, and fiscal developments
6. Aggregation and concentration of risk (including credit failure)
7. Credit rating
Conditions of actuarial funding
(M N S S C C) Mieke vaN SSCChoor van=fun=funding
- need a charging structure that has higher than normal levels of fund management charges
- Not all the future fund management charges can be actuarially funded
- unit-related surrender penalty, such that the unit reserve is not less than surrender value
- - acheived through capital / accumulation units
- - higher charges on all units
- Statutory constraints: Amount of actuarial funding that can take place
- unit fund must be contingent on death and (usually) survival for a minimum period of years
- prudently projected future net cashflows tot he insurer should remain positive (after AF)
What factors influence the number of model points chosen
VIT C CATS
- variability of contracts sold
- Importance of the investigation
- time available
- computer power and availability
- complexity of contracts in force
- age of the company
- Types of model - stochastic or deterministic
- sensitivity of the results using more or fewer model points
Basic features of LI model
- projecting cashflows and profit
- Allowance for interactions
- choosing between stochastic and deterministic
- projection frequency and time period
- allowing for guarantees and options
Product design factors (20)
SAMPLE DIRECT FACTORSS
Sensitivity of profit
Administration systems in place
Marketability
Profitability
Level/form of Benefits
Expenses and how they are allowed for
Discontinuance terms
Interests and needs of policyholders
Risk characteristics
Experience overseas
Competitiveness
Taxation
Financing requirements
Accounting standards
Consistency with other products
Timing of contributions
Options and guarantees
Regulatory requirements
Stakeholder
Subsidies (cross) extent
Factors to consider when setting bonus rates
When setting bonus rates, FSPs are PIGs
PRE
- informed by past practices and competitors
- expect to see performance in excess of inflation
Investment returns
- consider both actual and expected returns
- do not distribute more than you’re earning
- policyholders can easily compare returns with market returns, therefore cannot signifantly underdeclare in good times
Guarantees
- need to meet any minimum guarantees.
Funding level/free assets
- assess whether to retain some profit to increase funding level
- or increase bonuses from previous underdeclarations
- asset share gives an indication of the max bonus that can be declared
- bonus rates should be sustainable
Solvency
- bonus declarations shouls not impact solvency of company
Profits from other sources
- Bonus rates should consider shareholders (if company is not a mutual)
principles for carrying out alterations
CLAP CRESES
Consistency
- Boundary conditions
- paid-up value consistent with maturity values (at later durations) and surrender values (same before and after paid-up)
Lapse and re-entry avoided
- this would increase cost
- would give rise to the possibility of selection
Asset share/ Affordability
- paid-up value should be supported by the EAS on the basis of expected future experience
- altered premium and current asset share should be sufficient to meet benefits and expenses post-alteration
- The basis used to calculate the policy value after alteration should at least be stronger (more prudent) than the best-estimate basis
Profit
- expected profit from paid-up policy should be consistent with that expected from non-paid-up contract
- profit expected after alteration should be the same as expected amount had the policy been written originally on its altered terms
Competition
- alteration terms should take into account wat competitors offer
Regulation
- any restrictions imposed by regulators should be taken into account
Expectations (PRE)
- marketing literature and what company has done in the past
- paid-up values consistency with maturity values
- surrender values should be same before and after paid-up
- ensure fairness: not treating surrendering policy more generously than paid-up policy
Stability
- small changes in benefits should result in small changes to premium
- ideally, the alteration method should reproduce exisitng terms if policy is altered to itself
Ease
Selection
* Example: Change 5-year endowment assurance to 10-year endowment assurance. The benefit will either be paid out at the same time than before (if death occurs before alteration) or at a later stage (if death occurs after alteration) and premiums will be received for a longer period so the premium should be lower, or the sum assured should be higher.
* Those in poor health will benefit from the alteration because they will pay a lower premium and still receive the benefit at the time they would have.
* Therefore, the company may decide to:
- Require proof of continuing good health
- Only allow alteration on specific event e.g. birth of child
- Underwrite alterations and adjust terms
- Assume higher mortality when calculating policy value after alteration, for all alterations
The reasons for reinsuring
- Increase in capital
- Insurers require capital to hold risks
- by transfering risks to a reinsurer, the capital requirement can be reduced
- Limit the amount paid on any particular claim
- Limit total claims payout. (Through stop loss or catastrophe exess of loss)
- Reduce insurance parameter risk.
- quota share reinsurance would be used to share the parameter risk with the reinsurer.
- share the risk that level of claims are different from expected
- Although in practice the reinsurer would review the premium rates and the insurer’s control
- Reduce claim payout fluctuations
- Variance can be high due to:
- small number of contract for very large lavel of cover (Coinsurance/riskpremium method - individual surplus basis)
- lives insured are not independent risks (catastrophe, stop loss or excess of loss)
- Receive technical assistance
- considerable degree of expertise in underwriting, product design, pricing and systems design
- particularly important when a cedant intends to launch on a new line of business
- can give support for existing lines in areas such as underwriting
- Reduce new business strain
- through increase in capital (financial reinsurance)
- or through reduction in financing requirement (Original term - QS)
- Increasing available capital, will allow the insurer to write more new business, before NBS leads to tooo low solvency position
- Reducing new business strain means that more new business can be written for the same amount of capital
- reducing the extent of its parameter risk
- original terms reinsurance (with a high quota share reinsured) would be the most likely reinsurance to be used
- high quota shares will generally be reduced over time, as the insurer’s experience and expertise develops
- Reduce overall capital requirements by using a reinsurer’s capital
- Reinsurers may have lower capital requirements due to risk diversification
- Separate out different risks from a product
- allowing the cedant to optimise its risk management and capital requirements
- Allow aggregation of risks the cedant cannot manage on its own
- Cost reduction
- Due to different capital requirements, diversification benefits, different taxation and different assessment of risks
- reinsurer may be able to price the risk at a lower cost than the cedant
- may be able to pass on some of those profits by offering more favourable terms for its reinsurance
Considerations before reinsuring
Retention limits
factors to take into account when setting the retention limit include
Factors to consider: (UP Over FABRIC)
1. How familiar the company is with underwriting the type of business
2. Existence of profit-sharing arrangement in reinsurance treaty
3. Other product’s retention limit
4. Free assets level and importance of free asset ratio stability
5. Available reinsurance terms and dependence of such terms on retention limit
6. Average benefit level for the product and the expected distribution of the benefit
7. Risk appetite of the insurer (the smaller the company, the smaller the RL)
8. Nature of any future increases in sum assured
9. Effect of increasing or decreasing retention limit on regulatory capital requirements
Reasons for monitoring experience
- develop earned asset shares
- update assumptions as to future experience
- monitor any adverse trends in experience so as to take corrective actions
- provide management information
Principles for surrender values
Policyholders Eagerly Look At Coverage, Carefully Scrutinizing Deductible Sums.
PELACCSDS
- PRE taken into account
- Early durations: SV comparable to premiums paid
- Later durations: SV comparable to maturity benefit
- Asset share: should always be more than SV. in aggregate over reasonable time period
- Competitors SV should be taken into account
- Change infrequenntly, unless dictated by financial conditions
- Simple to calculate, taking into account computing power
- Documented clearly
- Selection against insurer should be avoided
State the
Requirements of a good model
Vivacious rabbits frolic, painting colorful jungles, including tiny dragons in caves.
* The model should be valid, rigorous enough for its purpose and adequately documented.
* The model should be capable of reflecting the risk profile of the products being modelled.
* The parameters should allow for all significant features of the business being modelled.
* The inputs to the parameter values should be appropriate to the business being modelled and take into account the economic and business environment in which it is operating.
* The workings of the model should be easy to appreciate and communicate. The results should be displayed clearly.
* The model should exhibit sensible joint behaviour of model variables.
* The outputs from the model should be capable of independent verification for reasonableness and should be communicable to those to whom advice will be given.
* The model must not be overly complex so that either the results become difficult to interpret and communicate or the model becomes too long or expensive to run, unless this is required by the purpose of the model.
* The model should be capable of development and refinement.
* A range of methods of implementation should be available to facilitate testing, parameterisation and focus of results.
