Part 8 Flashcards
Discontinuance in life insurance context
- Surrender – the policy stops, there is no further cover and the policyholder receives a lump sum payment (the surrender value)
- Lapse – the policy tops, there is no further cover and no payment is made to the policyholder by the insurance company
- Paid-up – here the policyholder ceases to pay premiums but the policy continues to offer the policyholder some cover
Key principles to consider in determining discountinuance terms for life insurance contracts
- Asset share
- Accumulation of premiums with investment return
- minus expenses
- minus cost of cover (contribution the policy needs to make towards the claims arising on the porftolio of similar policies)
- Policyholder expectations
- Competitive considerations
- Practical considerations
Consequences if benefit scheme is in deficit
Either
- Some (or all) of the membes will have to accept a reduced benefit
- the sponsor will (if possible) be required to make up the deficit
Discontinuance liabilities for benefit scheme, in order of priority
- Expenses
- Pensions in payment
- Members’ voluntary savings
- Early leavers’ benefits + Benefits for active members
Key assumptions to make to value the benefits from an employer-sponsored medical benefits scheme.
- Dicsount rate
- Inflation of medical benefits (may be higher than price inflation)
- Incidence of sickness and likely duration of illnessm split by age, sex and different types of illnesses
- Mortality rates
- Discontinuance rates
- Future entry rates to the scheme and likely enrty age/sex employees
Pros and cons of prescribing assumptions for valuing benefit scheme by legislation
- ensures consistency between different schemes
- ensures consistency between actuaries
- ensures consistency over time
- may aim to ensure appropriate assumptions are used
- the assumptions may not be suitable for valuing all schemes
- the assumptions may become outdated over time
- it takes time to change regulation so it can be difficult to ensure the assumptions are up-to-date
Pros and cons of allowing actuarial judgment with disclosure for setting assumptions for benefit scheme
- allows actuaries to include factors that are specific to the individual schems
- allows actuaries to exercise their professional judgement
- can easily be updated over time
- the requirement for disclosure ensures accountability
- assumptions may not be appropriate and may be manipulated
- there will be costs if the regulator checks the appropriateness of the assumptions used
10-year annual premium term assurance policy for a group of lives aged 40.
Prospective net permium reserve immediately befor 6th premium is due
Net premium for 10-year annual premium term assurance policy to a group of 40 years old
Chain ladder
- Produce table of cumulative claims payments
- determine the development factors for successive development years
- Use the development factors to project the cumulative claims payments
- determine the outstanding claims reserves by subtracting, for each accident year, the claims paid to date (leading diagonal figures) from the total projected claims (last column figures)
Value of a death-in-service benefit of 4 x salary at dat of death for a member aged 30 exactly (ignore expenses). Normal retirement age is 60.
Define going-concern basis
The accounting basis normally required for an insurer’s published accounts, that is based on the assumption tht the insurer will continue to trade as normal for the long-term future
Define break-up basis
A valuation basis that assumes that the writing of new business ceases and cover on current policies is terminated. Current policyholders would normally be entitled to a proportionate return of the original gross premium. Deferred acquisition costs would probably have to be written off. Also known as a wind-up basis.
Examples of how the assumptions of the valuation might differ according to whether a going concern or a break-up basis is being used include:
- Discount rate used to value future cash flows – more likely to use longer-term investment assumptions for a going concern valuation
- Expenses – For a break up valuation, the future liability cash flows will need to include the expenses associated with discontinuing or terminating the business
- Discontinuance rate assumptions – withdrawals might be assumed to increase if a provider breaks up as customers become worried about the security of their benefits
Two main approaches to carrying out a valuation of assets and liabilities
- the discounted cash flow approach
- the market-related approach
Setting the discount rate under 4 methods
Examples of exceptional events impacting financial accounts
- Merger and acquisition activity
- Internal restructures
- Unusual claims experience
- Exceptional expenditure
Operating ratio
Ratio of the sum of incurred claims and expenses to premium income
(used more in looking at short-term classes of business, rather than long-term classes)
Surplus arising
Change in surplus (assets - liabilities) over the time period
= profit
Levers on surplus (6)
- Reduce the likelihood of claims
- Reduce claim /benefit amounts
- Control expenses
- Increase number of policies that renew at the renewal date (or reduce number of contracts that lapse)
- Follow an investment policy that increases investment returns (subject to an acceptable level of risk)
- Adopt an effective tax management policy
Reduce likelyhood of claims by… (4)
- Reviewing ongoing claims (eligibility)
- Good underwriting of new business
- Good claims underwriting (reduce excessive claims, identify fraudulent claims)
- Customer incentives (e.g. discounted premium, higher deductible)
Reduce claim / benefit amount by… (3)
- Use of reinsurance
- Reducing future benefit payments (government could raise the age for state pension)
- Minimizing guarantees (discretionary benefit increases instead of guaranteed)
Control expenses by… (3)
- Reviewing expenses
- Flexible charges / premiums (option to increase premiums if experience turns out to be poor)
- Ensure claims expenses are commensurate (angemessen) with claim size
- accept small claims without further evidence. The higher the claim, the more effort to verify
Bonsues are given as a combination of… (2)
- Reversionary - regular bonuses added to sum assured. Once a reversionary bonus is attached, it becomes a legal liability of the company
- Terminal - final bonus added at the time a claim is made
