Revision

Question 1

Policy data checks

Answer 1

Recon of data (now vs previous model run)
* group data into large blocks (by product type and year of entry)
* test that Data at previous investigation + business come onto book - business gone off the books = data at current investigation
* For non-unitised, check: number of contract, premium, sum assured, attaching bonuses
* For unitised, check: number of contracts, number of units, premium, benefits, change in units due to fund switching, changes in premium and benefits under existing contracts
* check movements againts relevant accounts data

Check for consistency and sensibility:
* checking averages of premiums and sum assured and compare with previous yeat
* checking ratios of sum insured to premium, compare and check for sensibility
* for unitised: check that units purchased and encased correspond with revenue account and check that internal unit movements are consistent with surplus emerging during the year

Check for unusual values:
* check for zero values or very large values
* impossible ages
* group items and check how well distributed they are
* compare computer data with paper admin files with spot checks

Perform analysis of Surplus and analysis of embedded value
* compare A-L from one year to the next
* changes in surplus shuld be conributable to different components
* the unexplained change would be subject to tolerance level
* beyond which would trigger further investigation of the data

Question 2

Reasons for underwriting

Answer 2

• to identify lives with substandard health and to determine the appropriate special terms to be offered: reject, increased premium, reduced benefit, exclusions
• to reduce the effect of anti-selection
• to avoid over-insurance by means of financial underwriting
• adequate risk classification so that all policyholders are charged fairly
• to ensure that actual claims experience is more in line with expected experience

Question 3

Product features

Answer 3

Benefit:
- lumpsum/regular
- size
- duration of payment
- level/increasing

Claim:
- what triggers a claim
- exclusions
- deferred/waiting period
- IP: linked claim-conditions

premium:
- single/regular
- level/stepped
- reviewable/guarantees

Question 4

Common approach to setting surrender values

Answer 4

• asset share (>S, profit, < at early, cross-subsidy)
• prospective reserve (refer to basis & disadv: sensitivity)
• retro = early, blending into prospect. later
• surrender admin expenses
• general considerations (RECLAP CASES)
• dealing with bad experience:

1. ruduce early SV’s
2. increase cross-subsidies between early and late
3. considering policy terms and risk of negative publicity

Question 5

Outline the advantages and disadvantages to the company of using a cashflow method over the formula method to calculate its reserves.

Answer 5

Advantages:

• The cashflow method allows for assumed experience to vary over time, e.g. mortality improvements.
• This allows a stochastic model to be built for deriving a distribution of reserve level and for valuation of options.
• Allows for withdrawal experience explicitly – if withdrawal benefits have a non-zero financial effect, the resulting reserves will be more accurate.
• It allows more easily for complex benefit structures,
• e.g. where charges and benefits depend on future assumptions such as unit-linked business should the company sell this in future.
• The risk discount rate can take account of the term structure of interest rates.
• Tax can be allowed for more appropriately.
• Can more easily allow explicitly for future bonuses.

Disadvantages:

• Formula method is much easier and quicker to calculate.
• Formula does not require establishing/purchasing complex and expensive models.
• Formula requires fewer assumptions.

Question 6

Investment principles

Answer 6

Investment principles:

• The principles of investment are that an insurance company should select investments that are appropriate to the nature, term and currency of its liabilities.
• The investments should also be selected so as to maximise the overall return on the assets, where the overall return includes both income and capital.
• The extent to which the company may depart from investing in appropriate investments in order to match its liabilities, depends amongst other things on the extent of the company’s free assets.

Or (for second two bullets) these investment principles can also be expressed as:

The life insurance company should invest so as to maximise the overall return on the assets, subject to the risks being taken on being within the financial resources available to it.

Question 7

Valuing life insurance contracts:

embedded value

Answer 7

The present value of future shareholder profits in respect of the existing business of a company, including the release of shareholder-owned net assets.

• Embedded values are often used as a more realistic assessment of the value of an insurer
• recognises the value of any assets in excess of the reserves
• recognises the value to the shareholders of future releases of the margins in those reserves
• can be included as supplementary information in published accounts,
• or can be used for internal management purposes
• calculation is generally on a more realistic basis than the reserving basis
  *

Question 8

Definition

Long-term care Insurance

Answer 8

LTC insurance provides for the costs of long term care, which incorporates all forms of continuing personal or nursing care and associated domestic services.

The cover is intended for people who are unable to look after themselves without some degree of support.

It may be provided in the insured’s own home, at a day centre, or in a State-sponsored or care-home setting.

It can be funded by the state, private funding by individuals or charities.

It can be provided on an indemnity basis, or a non-indemnity (cash benefit basis).

Question 9

Impact of regulation on investment strategy

Answer 9

The impact of regulations include:

• Restrictions on the type of assets that can be invested in.
• Restrictions on the amount that can be invested in particular assets (to prevent concentration risk). These can be applied per asset class, per currency, per individual asset.
• Restrictions on the extent to which assets of a particular type can be included when demonstrating solvency.
• Maximum counterparty exposure to an individual company or individual (to reduce credit risk).
• Solvency capital may have to be invested in specific assets.
• Limitations on the extent to which mismatching is allowed.
• A requirement to hold a mismatch reserve or solvency capital if applicable.
• Prescribed assets i.e. a requirement to invest a minimum proportion of assets in specific types of investments (usually government bonds).
• Rules on how to value assets, incl. unlisted assets, depreciation of fixed assets.
• Tax regulation may treat some types of assets more favourably than others. .
• Regulations might require independent custodians.

Question 10

Determining a basis for Prospective value

Answer 10

Interest:
- current weighted average redemption yield of suitable securities to be its best estimate assumption.
- For blended basis, consider interest rate assumption in premium basis

Expenses:
- recent expense investigation, which would be same as premium
- allowance for renewal commission necessary

Inflation:
- consistent with the investment return assumption.
- real return anticipated on index-linked government stock will give an indication of what might be a suitable margin below the full interest rate assumption

Mortality:
- future expected mortality of those policyholders who are surrendering.
- lighter mortality than those who do not, since anyone conscious of their ill-health would not wish to discontinue their life cover.