Product Design & Management Flashcards
Responsibilities of actuaries related to product design:
- Pricing calculations (theoretical pricing)
- Advice on risks & how to manage them as well as advice on capital needed to manage risks
- Wrt. discretionary benefits, treat customers fairly in accordance w p/h expectations and fulfill TCF conditions in general
- Ensure benefit projections are not misleading and customers understand risks involved
Framework for product design:
- Identify need to review/design new product
- Develop/review/alter product
- Distribute product
- Gather & monitor the experience
- Look for need to make further changes to product
Just like the ACC
Why would we need to develop/change products?
- Innovation
- Regulation or tax law changes
- Desire to enter new market or sales channel
- Updating for experience
Identify need to review/design new product:
Innovation
- Designing new product that does not currently exist in mkt. e.g. derivatives designed to meet specific needs
- Challenges to innovation in insurance:
- –> Insurance is highly regulated
- –> No patent protection, new products can be imitated
- –> Complexity/expenses of creating new products
Identify need to review/design new product:
Regulation or tax law changes
- These may create new needs for customers, new products are made to meet new needs
- Present new opportunities to take advantage of e.g. Life insurance products developed to mitigate inheritance taxes
- Required changes to products e.g. no gender based pricing
Identify need to review/design new product:
How may a company go about entering a new market/ sales channel?
- Company would conduct mkt. research of competitors’ products and products potential p/hs would look to buy
- May imitate competitors’ products and use their premium rates as benchmarks
- May imitate products which have been successful in other countries (international practice)
- Research about the expenses related to diff. sales channels
- To help design product for new mkt.:
o Company may seek advice from a consultant
o Enter joint venture w another company such as a
reinsurer
o Hire competitors’ employees with relevant expertise
Identify need to review/design new product:
Update products for experience
- Products may be redesigned to reflect experience
related to:
o Customers - eg sales levels, lapse rates, claims
rates
o Economic environment - e.g. interest rates,
inflation
o The company e.g. expenses, management
Considerations when developing/reviewing/altering products:
- Product strategy
- Product management
- Designing features to control risks
- Pricing & taking account of competition
- Meeting expectations of stakeholders
- Project appraisal - whether to offer the product
Developing/reviewing/altering products:
Product strategy components to consider
- Decide specific market being targeted
- Distribution method
- Competitive advantages of the company
- Resources needed to make product successful and
how to meet those - Sales/profit expectation for the product
Product strategy:
Decide specific market being targeted
o Specific demographic group (students, high net
worth, older population)
o Target specific risk appetites of diff. customers
e.g. 1
choice of funds for pensions savings (blue chips
only? equity funds w unquoted & emerging mkts
shares?)
e.g. 2
types of risks covered under insurance
policy (3rd party only? or 3rd party + fire & theft or
fully comprehensive)
Product strategy:
Distribution method
- Dbn. method affects expenses/experience of the
product so diff premium would be appropriate
o Diff cost structure for diff dbn methods
o Directly sold policies may have diff lapse rates/claims
rates than those sold by intermediaries
o Diff price sensitivity - Methods of distribution
o Through intermediaries (independent
brokers/advisors)
=> complex products requiring explanation can be
sold underwritten & administered by
intermediaries however they are expensive
o Directly to consumer (internet, through mail order)
o Representatives e.g. door to door sales
Product strategy:
Distribution method -> Intermediary sales
Tied agents
- Only sell business after a period of training
- Significant expense to the company
- May produce higher quality of business
Brokers
- Can sell products as soon as they’re recruited
- May produce poorer quality business as insurer has
less control over the processes and flow of customers
Product strategy:
Distribution method -> Direct marketing sales
- Simple products can be sold this way e.g. websites
- Reduced cost of sales
- Sales may be more price-sensitive than with
intermediary distribution
Product strategy:
Identify resources needed
- Does the company have sufficient, reliable, past data?
Product strategy:
Identify resources needed -> Sufficient, reliable, past data availability
- This influences product design in 2 ways:
> With its own past data a company can estimate
assumptions to price products with more accurately
> With knowledge of the mkt. the company can assess
perceived value of product features - If company does not have past data, it must use
industry data - which will be heterogeneous (needs
to be adapted to the insurer’s experience) - or estimate
experience
