T_Short q's 2

Question 1

Problem with Applying a waiting period or accident-only period for cover.

Answer 1

Problems with this:
• While it removes the risk of immediate claims due to anti-selection it doesn’t removethe risk of people with generally poor health selecting against you.
• As policyholders may need the cover from outset this may not meet their needs.
• Could pose a reputational risk if deemed unfair.

Question 2

Only accept cases where people have recently (e.g. within the last year) gone for medicals for insurance purposes (either with your company or another company). problem?

Answer 2

Problems with this:
• It severely restricts the size of the market you can sell the product to.
• People who have had health issues develop since their last medical might still select against you

Question 3

Problem with Impose a pre-existing condition exclusion.

Answer 3

Problems with this:
• You are relying on claims underwriting, and you might not be able to identify and/or prove all cases at claims stage.
• In addition, claims underwriting can be very unpopular and have negative marketing consequences.

Question 4

Problem with Price conservatively to recognise the risk of anti-selection.

Answer 4

Problems with this:
• Might not be possible to price sufficiently for the anti-selection, as the selective effect may just get worse the higher the price and you may just end up with a lot of sick people only.
• Makes the product very expensive and possible unmarketable.

Question 5

Use a questionnaire only (including medical and non-medical questions). Problem?

Answer 5

Problems with this:
• Non-disclosure by applicants is possible
• Questionnaire might not cover everything that needs to be asked.
• Applicant might not be aware of their medical condition.
• Questionnaire may need to increase in length
• Success will be dependent on sound claims underwriting.

Question 6

One year ago, a policyholder purchased a 10-year without profit endowment assurance from the company. He has now approached the company requesting that the policy be altered to accommodate the fact that he wishes his future premiums to be 25% lower than the original premium.

ii. List two possible alterations to the original endowment assurance contract which may meet the policyholder’s needs. (1)

Answer 6

ii. Possible alterations to the endowment assurance:

• Reduce the sum assured
• Increase the policy term (leaving the sum assured unchanged)

Question 7

Principles for surrenders:

• Feasibility:

Answer 7

o Consider any legislative requirements/restrictions and market practice in the country.

Question 8

Principles for surrenders:

• Affordability:

Answer 8

o Over all policies (and over time) the Asset Share (less the costs of the surrender) is the maximum the company can afford to pay out without making a loss.
o As losses are inevitable at early durations (when asset shares may even be negative) the company may compensate by having surrender values below asset shares at later durations.

Question 9

Principles for surrenders:

• The company should treat withdrawing and continuing policyholders equitably:

Answer 9

o Thus on surrender of a non-profit contract the office may try to recoup a similar amount of profit as it would had the contract not been surrendered
o This is not always possible (or desirable as it can be argued that the office has no entitlement to future profit on premiums not yet paid)

Question 10

Principles for surrenders:

o For practical reasons the company may end up using a blend between surrender values being based on:

Answer 10

• asset shares initially (when > 0), moving towards
• a prospective method (with realistic assumptions) later on, where full expected profit is then retained by the company