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
Developing/reviewing/altering products:
Project management
- Setting objectives/expectations of the project
o Reflecting views of stake/h and agreed by principal
parties working on the project - Development of timeline of project
o Break down project into smaller steps each with a
target date - Assignment of responsibilities for each step
- Financial implications of the project
- Monitoring of progress and communication to parties
Developing/reviewing/altering products:
Designing features to control risks
- Product design can be used to control risks e.g.
o Risk of claim reduced by U/W eg excluding
people in poor health) & policy clauses (not paying
death benefit within 2 years of policy)
o Deductibles (excess limits) ensures the p/h shares
in any loss (lower moral hazard)
-> this also reduces no. of small claims => less exp.
& admin costs - However there is a balance with marketability & there may be legal/regulatory restrictions on ability to limit risk
e. g. legally no upper bound for cover provided on liability insurance products
Developing/reviewing/altering products:
Pricing & consideration of competition
- Theoretical price of a product reflects:
o Expected claims costs
o Admin & sales expenses
o Target profit margins - Needs to reflect mkt. prices offered by competitors
- Pricing is commercial judgment not simply an
actuarial calculation
Developing/reviewing/altering products:
Stakeholder expectations
- Think about various stakeholders and their goals -
e. g. s/h, directors, employees, consumer, retailers, regulators - and how to balance these goals
NOTE: there may be divergent goals WITHIN the provider e.g. Mkting team interested in increasing sales, actuarial team interested in solvency
Developing/reviewing/altering products:
Decide whether to offer the product
- Company considers:
o If the product meets a mkt need
o The price consumers are willing to pay
o The expected sales volumes - This helps the company answer 2 questions:
(1) Will the product meet profit targets?
(2) Can risks be suitably managed?
Distributing the product stage:
Two main steps involved:
(1) Developing documentation explaining what the product is - including policy documentation & mkting material
(2) Marketing to customers - by ads or intermediaries
Distributing the product stage:
Contract and sales material
- The customer usually decides to buy on basis of:
o Sales material
o Advice given by sales intermediary
o Product and benefit projections (should disclose
limitations of the product) - Policy document
- P/h reasonable expectations based on contract &
sales material should be met
Distributing the product stage:
Contract and sales material -> Policy documents
- Policy document sets out T&Cs ie. obligations of p/h &
provider to pay specified premiums & provide stated
benefits in policy doc - Policy wording is important : think judicial decisions &
legal disputes on ambiguous wording
o Policy wording usually approved by regulator
before sales
Distributing the product stage:
Contract and sales material ->
P/h reasonable expectations
- P/h reasonable expectations should be met by law
- Customers may not see policy document until after
the sale => need to be transparent - Reasonable exp. are not set out by law but reflect:
o The contract and representations @ point of sale
o Actual experience wrt mortality, investment etc.
o Company’s stated philosophy wrt bonuses
o History & past practice of company
o Standard mkt practice in insurance industry
Distributing the product stage:
Marketing
- May appoint external sales organizations
- Advertising helps direct sales & intermediary sales:
o By generating leads for intermediaries
o Raising brand awareness
o Targets certain market sectors eg. advertising in
financial media targets high income people
Monitoring the product stage:
- The provider will monitor the experience of the
product’s life to:
o Check that product is profitable
o Enable review of premium rates & valuation
assumptions - This process may show the need for new/modified
product leading to next product design cycle
Managing products: Commercial Issues
- Product factors influencing marketability
- Factors influencing profitability
Managing products: Commercial Issues
Product factors influencing marketability
- Does it meet customer needs?
- Should lower charges/premiums be charged?
- Are we competing on having the better product or
cheaper product?
Managing products: Commercial Issues
Factors influencing profitability
- Charges/premiums
- Claims experience & inflation
- Expenses & inflation
- Investment returns
- Withdrawal experience/ persistence (renewal) rate
- Competition (no. of companies/price sensitivity of mkt)
- Business mix sold
Managing products: Financial Issues
- Need capital to support sale of products due to:
o New business strain (arising from initial costs)
o Riskiness of contract (claims/benefits are uncertain
=> capital margin above best estimate cash outflow
level needed) - Minimising cap. requirement is important to provider
o Especially for small provider w low capital
=> Hence may design less risky product with low cap.
requirement to minimise cap. requirements
Managing products: Risk issues
Tools for risk management
- Underwriting (who to accept & at what price?)
- Product terms (exclusion clauses)
- Limits of cover (deductibles, cap on claims)
- Reinsurance
- Investment strategy
- Diversification across different products or p/h groups
and hedging products (Life annuity vs Life assurance) - Control over expenses (eg minimise expenses and
only pay valid claims)
