T_Short q's 4 Flashcards
Setting Base mortality assumption
- A good starting point will be the experience for the current book of business.
- Mortality for the new product is likely to be (significantly) worse due to the fact that there is very little underwriting.
- In particular you will need to add a loading for HIV, since an HIV test is not being done.
- The company may have experience on other products it writes, with limited underwriting, which could be used to calibrate the fully underwritten experience.
- You should make an allowance for anti-selection, given that no medical tests will be done.
- You can get pricing assistance from reinsurers, who may have experience on similar products.
setting expense assumption
- The expense assumptions will be very different to those for your existing product.
- However, the total expenses may end up being similar.
- You do not need to make an allowance for commission.
- You need an estimate of the total marketing costs for the period over which you are doing the pricing.
- The take-up of policies per campaign / per Rand spent on marketing is a key assumption.
- The sums insured will be lower than for the existing product, so you will need to consider carefully how to spread the expense per policy.
- The underwriting expenses will be significantly less than for the existing product.
- You will need to make an allowance for the cost of the IT development of the on-line offering, and the cost of the call centre.
List 8 key parameters that you would require assumptions for in order to price a new product
- Base Mortality rates
- Expenses
- Lapse rates
- Mortality trends
- Inflation – of expenses
- Interest rates
- Margins
- Profit requirements
- Anticipated volume of business
- Mix by distribution
- Average sums assured
You are the statutory actuary of a small, new, life insurance company operating in a country with a developed life insurance market. Your company only writes conventional life insurance business. You are responsible for setting all of the assumptions for the valuation. The Managing Director is concerned about protecting the future profitability of the business, and in particular is concerned about the risk associated with inaccurate valuation assumptions.
Explain what you may be able to do (other than through the use of reinsurance) to remove as much of the risk associated with the possibility of the company’s actual experience differing from the valuation assumptions as possible, and what problems you might encounter in trying to do this. [10]
Mortality
Mortality:
• Underwriting could be revised so as to mitigate mortality risk.
• Set up a mortality fluctuations reserve.
Problems:
• The additional cost of strengthening underwriting.
• The impact on sales of additional underwriting.
• The company may not have sufficient free assets to handle setting up additional reserves.
You are the statutory actuary of a small, new, life insurance company operating in a country with a developed life insurance market. Your company only writes conventional life insurance business. You are responsible for setting all of the assumptions for the valuation. The Managing Director is concerned about protecting the future profitability of the business, and in particular is concerned about the risk associated with inaccurate valuation assumptions.
Explain what you may be able to do (other than through the use of reinsurance) to remove as much of the risk associated with the possibility of the company’s actual experience differing from the valuation assumptions as possible, and what problems you might encounter in trying to do this. [10]
General (relating to policy design):
General (relating to policy design):
• Risks can be reduced by appropriate policy design to have policyholders sharing in the risk, such as:
• Increase proportion of with profit policies
• Introduce unit-linked business, which would allow variable charges (e.g. mortality or expense)
Problems:
• May not be easy to change business mix in this way.
• Office has no experience of unit-linked business, and it may be a difficult to build market share.
• Standard definitions should make it easier to collect industry wide data, which should lead to better information on which to base pricing.
• These benefits also apply reinsurers.
You are the statutory actuary of a small, new, life insurance company operating in a country with a developed life insurance market. Your company only writes conventional life insurance business. You are responsible for setting all of the assumptions for the valuation. The Managing Director is concerned about protecting the future profitability of the business, and in particular is concerned about the risk associated with inaccurate valuation assumptions.
Explain what you may be able to do (other than through the use of reinsurance) to remove as much of the risk associated with the possibility of the company’s actual experience differing from the valuation assumptions as possible, and what problems you might encounter in trying to do this. [10]
Withdrawals:
Withdrawals:
• Could use conservative assumptions to protect against non-recovery of expenses on early withdrawal.
• If withdrawals are monitored at an individual intermediary level, poor experience can be ameliorated by appropriate financial incentives based on withdrawal experience.
Problem:
• Conservative assumptions do not remove the risk associated with withdrawals.
• Regulation may not permit appropriate intermediary incentives.
You are the statutory actuary of a small, new, life insurance company operating in a country with a developed life insurance market. Your company only writes conventional life insurance business. You are responsible for setting all of the assumptions for the valuation. The Managing Director is concerned about protecting the future profitability of the business, and in particular is concerned about the risk associated with inaccurate valuation assumptions.
Explain what you may be able to do (other than through the use of reinsurance) to remove as much of the risk associated with the possibility of the company’s actual experience differing from the valuation assumptions as possible, and what problems you might encounter in trying to do this. [10]
Commission:
Commission:
• If you can get the intermediaries to agree to a clawback of commission that matches how you earn back the income over the lifetime of the policy, you would remove any risk around the commission assumption.
Problems:
• Competitive pressures will imply that it is unlikely that you would get intermediaries to readily accept this clawback approach.
• Adopting this approach would likely make your company extremely unpopular with intermediaries.
(a) Linked claims
(a) Linked claims
These relate to IP claims whereby a claimant, having been in receipt of claim payments, recovers and returns to work, but within a specified period (the “link period”) suffers a recurrence of the same disability, and is eligible for immediate claim payments without the imposition of another deferred period.
(a) Proportionate benefit
(a) Proportionate benefit
Under IP policies, if a claimant takes up employment in an occupation that is different to the one from which he or she was originally incapacitated, it is usual for the continuing benefit to be reduced. The reduction will relate to the ratio that the gross earnings from the new job bear to those from the occupation against which disability was being claimed.
(c) Rehabilitation/partial benefit
Rehabilitation/partial benefit
This IP benefit is payable when a claimant is no longer totally unable to follow his or her original occupation and returns to it in a reduced capacity. The amount of benefit is usually calculated in the same way as that for proportionate benefit, as described above.
