PRODUCT Flashcards
Rating factor considerations
SVMCSM
- Is it verifiable?
- Is it measurable?
- Is it correlated with existing rating factors?
- Is it significant?
- Is it socially acceptable?
- What is market practice?
What is smoothed bonus business?
- These products were created to combine stable returns with exposure to the stock market.
- Investment returns are earned by policyholder through discretionary bonuses declared by the insurer.
- This discretion is applied with the aim of smoothing bonuses via smoothing fluctuations of market returns of underlying assets.
- Once a bonus is vested, it is considered guaranteed, so it cannot be removed or reduced at maturity/death due to poor investment returns.
What is the difference between unit-linked WP and smoothed bonus business?
- unit-linked PH are more exposed to volatility of market movements in ST so fund value moves up and down
- with smoothed bonus a guaranteed value is built up over time
- however, in LT smooth bonus PH are also exposed and will have lower bonuses and non-vested bonuses removed in extreme cases
- the returns on a smoothed bonus policy < otherwise equivalent unit-linked policy, due to the cross-subsidy (but opposite it also possible) + fee charged by insurer due to guarantee
What is MVA?
- book values (which are contribution + declared bonuses) are guaranteed at claim stage
- vested benefits are also guaranteed at claim stage
- but book values and vested benefits are NOT generally guaranteed on surrender
- in practice the surrender benefit is the lower of book value and market value
- the market value adjustment is the adjustment required to get from book value to market value (funding level is applied to MV)
- not applying MVA would leave remaining policyholders in a worse position than before
Why is MVA applied?
- if the insurer’s market value < book value, then funding level is below 100%
- if a policyholder surrenders and is paid out book value, this worsens the funding level
- if multiple PHs had to surrender this would have a negative impact on remaining PH
- as a result, MVA applied to ensure funding level is kept as is
- when book value < market value, don’t increase the surrender value (i.e. no MVA > 100%), because this would encourage surrenders.
- it would also break down cross-subsidy system for guarantees
- there would never be any positive contributions to BSR to allow for smoothing in tough-times.
Where can big differences in smoothed bonus funds?
guarantees: guarantees book value payout, vested benefits, SH support (inject capital if MV < vested benefits), minimum return guarantee
bonuses: interim vs. final bonuses vs. terminal bonus or vesting vs. non-vesting bonuses.
bonus smoothing: very smoothed vs not (more smooth = bigger cross subsidy, BSR more volatile)
surrender values: producer/formula used up to insurer, fairness is NB
charges: major area for competition (keep as low as possible)
management actions in sticky situations: MVA on surrender, under-declaration of bonus, removal of non-vested bonuses
investment strategy: insurer’s discretion
What is an interim bonus?
- usually used when final bonus declared less frequently than monthly and in arrears
- if book value of a policy is calculated in between final bonus declaration dates
- interim bonus rate is the return the PH will earn over the period from the most recent final bonus declaration date to the calculation date
Where may differences lie in disability products (IP + lump sum) lie?
- waiting period length
- disability definition: occupation based (own or any), ADLs, ADWs, cognitive or physical impairment , unable to meet ADLS ever = permanent
- benefit amount: usually up to 75% of income (gross or net) paid monthly
- ongoing proof that unable to work
- rehab programmes to encourage return to work
What is an endowment and where may the differences lie?
- returns: guaranteed, investment-linked, bonus
- surrender values may possible
Where may differences lie in critical illness products?
- basic vs. comprehensive: 4 main CIs vs rare diseases included
- severity-based (tiered) vs. fixed benefit
- one vs. multiple payouts
- family add-ons: for spouses/children
- CI definitions or diagnoses criteria
- premium type: guaranteed vs. reviewable vs. age-rated
- death benefit add-ons
- premium waiver add-on if too sick to pay premiums
What are the general differences when it comes to products?
- benefit size
- premium type: guaranteed, reviewable, level, increasing
- term: 5 years, whole of life
- payment period: 2 years, whole of life
- uw: full medical vs. moratorium (pre-existing conditions excluded for 2 years)
What is the difference between group and individual IP products?
What are the key types of cell captives?
First-party cell business: Where the cell owner and policyholder are the same entity. E.g. large corporation that creates a cell to self-insure its own risks
Third-party cell business: Where the cell owner and policyholders are different entities e.g. an underwriting manager who creates a cell to offer specialised insurance products to multiple clients
Promoter cell business: Insurance written directly on the cell captive insurer’s license, not ring-fenced in a cell structure
How do cell captives operate?
Operationally:
- each cell operates as independent company
- income and expenses are ring-fenced
- cell owners provide capital required in their cell
Regulatory:
- solvency of each cell and registered entity considered
- registered entity responsible for compliance and governance of all cells
- if registered entity runs into solvency issues, separation between cells ignored
What is a binder holder?
- cell captive insurer provides the license and regulatory framework
- cell owner provides capital and may design insurance products
- binder holder may handle day-to-day operations of writing policies and managing claims
- they are able to do this through a formal signed “binding agreement”
- day to day operations may include: > open/alter/renew insurance policies on behalf of the insurer
> determine policy benefits and premiums for specific insurance products
> settle claims within defined parameters
> collect premiums from policyholders
