T_Short q's 5

Question 1

(d) Replacement ratio [4]

Answer 1

Replacement ratio

This refers, in the context of income protection insurance, to the ratio of net (in benefit) income to net pre-disability income.

Question 2

(b) deferred period

Answer 2

(b) Most often encountered in income protection (IP) insurance.
It is the period of incapacity before any benefit is paid. The standard deferred periods offered by companies are 4, 13, 26 and 52 weeks (or 1, 3, 6 or 12 months). Group schemes may offer 28 weeks deferment.
May have a split deferred period.
Used to reduce the number of trivial claims and associated expenses and to avoid overlap with any State benefit provision for short term sickness.

Question 3

(c) linked claim [6]

Answer 3

(b) Relates to IP claims.
If a claimant, having been in receipt of claim payments, recovers and returns to work but suffers a recurrence of the same disability within a specified period (the “link period”) they will be eligible for immediate claim payments without the imposition of another deferred period.
The standard definition refers to a linked period of 6 months. Used to encourage return to work.

Question 4

ii. Explain the different definitions of disability that may be used in an IP product, including the relative levels of cover provided. [8]
Own occupation

Answer 4

This definition of incapacity provides the greatest level of income protection cover. For example, a policyholder may have a high pressured job that leads to high stress levels which in turn leads to them no longer being able to fulfill the duties of that specific occupation. The policy would pay out and the insurer would not require the policyholders to take a less stressful position.

Question 5

ii. Explain the different definitions of disability that may be used in an IP product, including the relative levels of cover provided. [8]

Any occupation

Answer 5

This definition provides less earnings protection than a policy with an own or suited occupation incapacity definition. The insurer may ask the policyholders to undertake any occupation for which they are deemed to be medically capable. For example, policyholders who previously had an active occupation but are now suffering from physical disability may be required to take an office based position at their existing company or elsewhere.

A time limited mixtures of the above may be used e.g. inability to perform own occupation for an initial period (e.g. the first two years) of claim followed by inability to perform any occupation thereafter.

Question 6

ii. Explain the different definitions of disability that may be used in an IP product, including the relative levels of cover provided. [8]

Suited occupation

Answer 6

This provides a lesser degree of cover than a policy with the “own occupation” definition. Under this definition the insurer may require the policyholder to return to work in an occupation for which they are suited. The insurer will determine what is a suited occupation based on the policyholders’ skills, training, qualifications and experience. For example, a policyholder suffering from stress may be required to take a less stressful position at the same firm or elsewhere.

Question 7

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]
Margins:

Answer 7

Margins:
• You can introduce safety margins for each of the assumptions or you can allow for an overall safety margin across all the assumptions (or you could do both – which would be conservative).

Problems:
• You may be restricted by legislation as to what additional margins you can include
• The tax authorities would also not want to see you using too large a margin as it would delay the payment of taxes due to them (assuming the business is profitable)

Question 8

The following are principles that apply to all alterations

• Profit Contribution

Answer 8

 The premium for reduced Sum Assured is based on the current new business rates and the alteration would be consistent with the margins on new business.
 In addition, profit is being extracted by the use of the Surrender Value:
 Because the reserve on the premium basis is used, historic margins are retained by the company.
 However, at early durations, when the asset share is negative, there is a loss on the existing policy.
 In addition, because the original pricing basis is used to spread the surrender value, the margins included in that pricing basis should emerge in the future.

Question 9

The following are principles that apply to all alterations

• Expenses

Answer 9

 No allowance appears to be made for expenses incurred on the alteration.
 There is a double-counting of initial expenses, because the new business premiums include a loading for these expenses.
 However, there is no allowance for the cost of alteration, which partially offsets
 the double-counting of initial expenses.

Question 10

The following are principles that apply to all alterations

• Boundary Condition

Answer 10

 Paid-up is a boundary condition for a reduction in sum assured and this design should be checked for consistency with the paid-up basis.
 A surrender is another boundary condition, and the proposed alteration value is by definition consistent with the surrender value on the existing policy.