Chapter 20

Question 1

Describe the factors to consider a suitable design, in terms of benefits and charges, for a life insurance product

Question 2

List reasons why a product might be created or modified

Answer 2

• Gap in existing product range (market or other companies)
• Market awareness of new product need or feature
• availability of new financial instruments making a new product feasible
• a legislative or fiscal change rendering possiblee, or more financially attractive, a new product
• inadequacy in an existing product, such as:
• more profit demanded by shareholders, so doesnt meet profit criteria
• more sophisticated profit testing techniques
• insufficient use of capital
• demographic shifts => inappropriate premium or charging structure
• a revised investment return outlook
• a revised expense experience

Question 3

How can the capital strain of a non-linked product be reduced?

Answer 3

• reduce initial acquisition cots, initial admin costs
• reduce valuation strain by reducing guarantees ad increasing valuation interest rate
• financial reinsurance

Question 4

List 7 types of guarantees

Answer 4

• surrender values
• interest
• investment return (bonuses) accrued to date
• expenses
• mortality (or other risk factor)
• annuity option
• renewability without medical evidence

Question 5

List the factors that must be considered when restructuring or designing a product (14)

Answer 5

“Clever Product Managers Carefully Focus, Reviewing Good Strategies, X-raying All Critical Risks, Sustainability, Complexity.”
1. C – Customer’s needs
2. P – Profitability
3. M – Marketability
4. C – Competitiveness
5. F – Financing requirement
6. R – Risk characteristics
7. G – Guarantees (onerousness of)
8. S – Sensitivity of profit
9. X – Cross-subsidies (use X to remember “cross”)
10. A – Administration systems
11. C – Consistency with other products
12. R – Regulatory requirements
13. S – Sustainability of investment options
14. C – Complexity of product

Question 6

What options does an insurer have when a product has large parameter risk?

Answer 6

• reinsurer a large part of the risk
• offer unit-linked version instead or reviewable premium contract
• incl. very large margins in premium rates
• offer the product has a rider benefit rather than a stand-alone=> optionality means there will be limited exposure to that risk and the premiums and benefit structure can be readjusted more easily than the base product

Question 7

How can the product design of a unit-linked product minimise the sensitivity of profitability to adverse experience? (5)

Answer 7

• No investment returns
• Mortality charges at discretion of insurer
• Expense charges at discretion of insurer
• No guarantees surrender values
• Try to match the income (the charges) with outgo (expenses and benefit costs) as closely as possible by duration, especially initial expenses

Question 8

How can the product design of a non-linked product minimise the sensitivity of profitability to adverse experience?

Answer 8

• No guaranteed surrender values
• Include clawback of commission for early withdrawals

Question 9

List the features that make a product design riskier

Answer 9

• Lack of historical data
• High guarantees
• Policyholder options
• Overhead costs
• Complexity of design
• Untested market
• Guaranteed premiums

Question 10

List the features in a product that might lead to a lower risk discount rate

Answer 10

• Lack of historical data
• High guarantees
• Policyholder options
• Overhead costs
• Complexity of design
• Untested market
• Guaranteed premiums