Product Design Flashcards
Process for designing products
- Find out what the sponsor or individuals require from the benefit arrangement
- Identify what individuals may need and value in relation to the benefit provision
- Identify the risk factors involved
- Asses the costs - change in cpl,pays account and how these costs can be shared
- Consider admin implications,legislative constrains and need for specialist advice
- Consider the impact of proposed design on public perception
- good or bad - in appropriate - Consider transitional arrangements
- Finalise design
Cost analysis
Asses the costs of various benefits and is useful in estimating the budget and assessing whether a particular benefit system is sustainable over time
- breaks down current and future costs , changes in cost as a result of changes in number of lives covered
- does not take the impact of benefit into consideration
Cost effective analysis
Asses the cost of the benefit relative to its non monetary benefits
CEA = cost in monetary terms / quantitative measure of benefit effectiveness
Good :
- benefits relative to the cost is easy to understand
- benefits do not have to be converted to monetary terms
Bad
- all benefit systems must have the same measure of effectiveness
- an inability to cost multi dimensional and cross correlations
- CEA will underestimate the value of various benefits
- CEA does not reflect the utility of benefit service to the population covered
Different types of eligibility criteria
- Age related
- Service period related
- Type of work related
- hours worked related
Age criteria
Age eligibility criteria set minimum or maximum ages. These criteria apply to whether one is eligible to join an arrangement or to continue participating in the arrangement
Arguments for and against min age criteria in an employee benefit context
For :
1. In a contributory context, ensures that younger employees have sufficient take home pay
2. Young employees have a very high turnover rates, so a minimum age requirement can deter young members from leaving shortly after joining
3. Young workers rarely have significant needs for risk benefits
Against
1. To maintain stability of the risk pool to include younger members with a lower propensity to claim risk benefits
2. The earlier members start saving, the lower the rate of saving will need to be for a given outcome at retirement
3. There are. More direct ways to exclude short serving employees
These criteria may be illegal
Arguments for or against max age criteria
For
1. A db fund, where benefit accrues with service, can prevent individuals from achieving very long service and therefore, high benefits
2. Avoids high admin cost for benefits for someone who joins the employer later in life
3. Cost of death and diseability benefit rises shartokh with age and excluding other workers helps to control these costs
4. Restricting access to death and disability benefit minimises the cost and adverse selection risks while it still allows older workers to save towards
5. The maximum age limit can deter older persons who know that they are a high claim risk from joining a fund to obtain risk ben without medical underwriting
6. Adding a max age limit for children on PMI policies helps to ensure that contributors are aligned with risks and that benefits are more appropriate to needs
Against 1. This group may still need to work as they benefits are inadequate, therefore, excluding them means that their needs are unmet
2. These criteria may be illegal
Service period eligibility
Required an individual to be a member of a scheme m fund or risk pool for a minimum period before they can claim
Advantages or disadvantage for service period eligibility
For :
1. Reduces admin cost for those who leave soon after joining the arrangement
2.allows soonsor to target its resources effectively
3. Results in lower costs overall
Against
1. Less attractive to employees who prefer to join immediuatvek
2. Ineligible employees may alternative private pension instead
3. Those in greatest need have no protection
4. May be illegal
Type of work eligibility
Arguments for
1. Allow employers to reward groups providing services that are deemed to be most valuable to the country
2. Allow benefits to be tailored to specific needs
3. Occupation help to and safety requirements may compel workers in specific high risk jobs to have employer funded healthcare
Against
1. Regarded as dsicrimatior. If not union supported
2. Cumbersome if individuals change the type of work over their careers
Many benefit arrangements are long term whereas the need for various skills changes over s hort term
Hours worked eligibility criteria
For :
1. Avoid theprovision benefits that are excessive in value in comparison to the hours worked
2. Avoid proportionally high admin costs
Against
1. Illiegal if part time works are mainly female
2. Labour market distorting sir employees or employers maintotoyate hours to avoid joining arrangements
Eoh limit or free cover limit or non selection limit
Basic level of cover granted automatically without needing any evidence of health . Standard level of premium groups should be compulsory abs if a minimum size to qualify diff bus approach if underwriting
Indemnity benefits for and against
For :
1. It is forced on actual outgo so more focused on meeting the needs
2. Improves peace of mind of the policyholder or member
3. Transfers medical inflation risk to the risk pool
4.
Against
1. It can be prone to moral hazard unless there are other additional mechanisms
2. Other mechanisms such as negotiations may be lengthy an
3. Because of additional medical inflation risk being passed onto pool, the cover is much more expensive and can be unaffordable.
Factors that must be considered when an employer defines salary
- To include goods in kind or subsides to the income definitions - if this is included the take home will be reduced by more than the contribution rate
- Variable items such as commission or bonus - will be a better reflecting of cost of living if included but will lead to volatile salaries and if the benefits are linked to salary this will lead to volatile benefits
3.Averaging periods for benefits - to reduce volatility but will increase complexity - Predictability
5.Administrative ease - Moral hazard
Two main types of measures of annual charges on % of assets under management
- Total expense ratio :
Unit trusts or collective investment scheme
Retrospective measure that is calculated by taking the (fees paid out of the fund assets over the previous year) by (average balance in the fund) - Reduction in yield - restrospective
How much charges reduce yield on the assets that is paid to members or policyholders over the future life of the product based on standardised assumptions about the performance of the underlying investments and the period that investors has held the product
Cost utility analysis
