Projects Flashcards
Company Closed to new business: General factors
- Choose action with highest return on capital/EV for given risks
- Additional capital required
- Time period involved
- Effect on solvency/ capital requirements
- Reputational risks and strategic considerations
- Cost of capital and methods of financing. Risks associated and better use for capital
Opening company to new business/ Recaptilising
How to best focus investment, business plan and feasibility of target
Once-off costs eg re staffing, advertising, call centres
Distribution channels: new or old
Competitors and market share
Repricing old products/ developing new products
Capital for:
• Costs for opening to new business
• Investment in company infrastructure/systems
• Product development/ new product and distribution channel costs
• New business strain due to acquisition cost and setting up reserves
Reinsurance: reduce capital strain, technical assistance
Investment policy and assets management. Internal/external asset management team for unit-linked.
Financial projections:
• Profit testing
• Expected policy cashflows/ EV
• Should take into account overhead costs and once -off cotss by spreading over in force policies.
• Take into account tax position
• Statutory liabilities, capital requirements and free assets
• Sensitivity and scenario testing, use to determine extra injections of capital. Use different scenarios eg aggressive/conservative. Test impact of NB levels being lower than expected.
Merging Large and small companies
Will only need one license
APN108 (Independent Actuary), APN109(Takeovers) , Section 50, 51, GOIb6
Impact on Capital requirements
Once-off costs
Economies of Scale
Similarity of products
Reputational – reaction of policyholders
Staff, rental agreements, geograhic locations
Larger company may get preferential reinsurance
May need less reinsurance
Consider individual vs Cpmbined ROEV
Differences in tax position eg one may be in XSE and the other in XSI
Return From Life Insurance Company
The return achieved by the investment bank over the 5 years will be made up of the realised profit from buying and selling the 10% shareholding, the dividends received over the period, less any tax. The 20% return will be greater than the RDR assumed in the calculations as this will allow for new business growth as well. The return will be affected depending on the method by which the investment will be financed.
May consider using a higher risk discount rate to determine the value of new business than that for in-force business since there are additional unknowns.
Will need to consider how easy it will be to find a buyer for the 10% shareholding at the end of the 5 year period. In addition the price will be based on the expectation at that time of new business value still left in the company. Hence the expected return will be very sensitive to the change in the new business multiplier between the purchase and the selling date.
A suitable multiplier will depend on the prospects for new business growth in the country, using the current distribution channels. So will need to assess the market for insurance and the company’s competitors. This will include an assessment of the overall expectations of the insurance industry and how this particular life company compares to the market average. Is this a particularly successful company?
What price they will be able to negotiate and how this relates to the appraisal value calculated using a set of best estimate assumptions.
How the risk of investing in a growing life company compares to other investments. Does the expected return compensate sufficiently for the risk taken?
The quality of the existing management and how likely they are to stay at the firm for the foreseeable future. With only a 10% shareholding the investment bank is unlikely to have major control over the management of the company.
What are the external factors, outside of management’s control that may influence the value of the company? Example a downturn in the economic conditions over the 5 years may severely reduce the value of the company in five years time.
How does the projected operating profit of the company compare to the historic profits shown by the company?
Has there been any major litigation against the company around the products it sells? Is there a significant risk of potential future litigation?
How sensitive is the return to the various assumptions made. Will need to consider a number of scenario tests. These should include adjustments to the main drivers of the value of the company (e.g. new business margins, new business multiplier, the risk discount rate, mortality rates).
Whether new capital may be required to be injected into the company to continue to support the new business growth.
Market price of similar quoted companies
Unprofitable Term Assurance:
Changing from guaranteed to reviewable rates
With reviewable rates, companies are not exposed to the risk that future premiums are worse than expected, it would have to be modelled stochastically or extra margins for adverse experience would be included for guaranteed rates. Hence reviewable would result in lower initial premiums.
Reviewable rates are less capital intensvive : lower margins in reverses and capital requirements
Potential policyholders may not like increase in premiums/may prefer guaranteed rates. Need to assess the attractiveness of cheaper premiums vs guarantee
Look at competition offerings, to indicate if there is genuine demand. Do market research to determine demand.
Consider if it will increase volumes or simply replace that sold on guaranteed rates. Profit test different scenarios.
Consider once off expenses with making the change
Capability of monitoring experience and adjusting premiums, may not have sufficient volumes for meaningful analysis. There maybe a lag between identifying experience and changing premiums. There may also be maximum increases in premiums
Potential bad publicity from reviewable premiums, selective withdrawals and lower new business volumes.
Relapse and re entry
Policy documentation that may create PRE need to be properly framed. Eg company needs ro be clear how much experience would increase premium. Good experience may have lead to decrease in premium
Unprofitable Term Assurance: Reducing RDR
RDR= risk free rate plus risk premium
Should be higher the higher the uncertainty in cashflows
Lower rdr will result in higher PV of profits and hence lower premiums whilst meeting profit targets and should result In a higher volume of new business.
However return on capital will be lower, even though profits are apparently higher
Economic conditions may changed since RDR was last reviewed, if risk free is lower than this would justify a lower RDR. This should be applied to all products.
Any difference in RDR between products, should reflect risks between products. Reducing rdr on funeral products in isolation, will make them seem more profitable than other products but the return on capital is lower, indicating capital should be invested elsewhere.
If premiums are uncompetitive it could be an indication that competitors are using a lower RDR, can check industry surveys or reinsurer.
A trade of higher new business volumes vs lower return on capital.
Unprofitable Term Assurance: Reducing: Pricing Marginally/ without allowance for overheads
Would lead to lower premiums, more competitive and higher volumes.
Overheads would be covered by entire product range/other products, hence the other products would have to cover this cost
Company should aim to maximise profits of whole product line while covering expenses. If other products are less price sensitive than should lead to an increase in profitability. Will need to consider impact on both term assurance and other product volumes.
Selling additional volumes of Term assurance may result increased overall profitability, may end up covering overheads. Introduces mix and volume risks
Not always possible to separate out costs accurately, leading to incorrect pricing.
May lead to new business strain, lapse and re-entry, pressure on admin systems
Unprofitable Term Assurance: Reducing: Add option to increase cover at each anniversary
It may attract customers due to increase of real value cover. It may be innovative if competitors are not offering
Unlikely to significantly impact volumes
Anti-selection risks will increase, policyholder likely to exercise if in bad health. May lead to poorer claims experience.
Anti-selection could be reduced by limiting initial sum assureds, limiting % increases.
Company should allow for worst experience when pricing. Company would need to determine the proportion of policyholders execersing the option.
Pricing: Initial premiums should be higher than policy without option. But if premium is too high policy will sell. Expenses associated with each increase should be priced in.
Admistartion systems would need to be updated to handle increase
SAP104, expected voluntary option take up should only be recognised in reserves if it results in a loss, hence it may result in higher reserves and capital requirements.
