1
Q
List various product categories of a Life insurer? (5)
A
- Risk products
- Investment Products
- Universal life products
- Annuity products
- Conventional with-profit
2
Q
Describe risk products and their common features? (11)
A
- Provides mainly risk cover
benefits are provided in case of a life event (death, disability, critical illness) - Generally do not offer surrender or maturity benefits or include any savings element
- Features influenced by
o financial sophistication of policyholders and
o their access to financial advice - Policy term – whole of life, specified term or until specific age
o Whole of life no surrender value! - Choice of disability and critical illness benefits – whether they want it and definition
- Standalone or accelerator (for disability and critical illness)
o Standalone: sold without a death benefit no payment on death
o Accelerator: attached to a death benefit; if a CI claims occurs, the death benefit is reduced - Premium frequency – recurring (monthly, quarterly or annual) rather than single premium
- Premium paying pattern – level or increasing
- Level of cover – choose within benefit limits
- Future cover option (Guarantee insurability options) – option to purchase cover in the future without proof of good health, except for an HIV test
o Exercise on benefit anniversary or specified events (marriage, birth of child, new mortgage) - Products with limited underwriting (target low income segment): policyholder is not medically underwritten limit anti-selection through waiting periods etc.
3
Q
Describe the risk applicable to risk products? (7)
A
- The primary risk is related to the accurately allowing for the incidence of the claim event in the pricing of the product
o An appropriate model allowing for correlations between conditions and illnesses, adequate data, additional risk margins, competitive premiums
o The current incidence rate may not be applicable in the long-term due to changes in medical science
o To the extent that disability may be linked to the economic cycles, there is a risk that there are changes in the economic cycle not allowed for premiums
- Anti-selection to weak underwriting procedures
- Weak claim definition may result in higher than expected claims
- Furthermore the claims management process may not be able to have the technical expertise to evaluate certain claims
- Reputational risk is the policyholder does not adequately understand the claim definition i.e. technical definition vs. layman understanding
- There is also withdrawal risk which may result in financial loss at early durations
- Furthermore the withdrawals may be selective which may result in worse morbidity experience for remaining policyholders
- There may be additional pricing and anti-selection if future cover options are available
- Medical advances leading to mismatch between incidence of disease and definition in policy contract.
4
Q
List mitigation techniques to reduce these risks? (7)
A
- Underwriting – depends on the level of cover, entry age, the complexity of benefit
- Waiting period
- Reviewable premium rates
- Age limits applied to benefits
- Clear disclosure, to mitigate reputational risk
- Reinsurance
- Retention incentives – eg cash back plans
- Limited Sums Assured (SA)
5
Q
Describe premium paying patterns for risk products? (3 main, 8 sub)
A
- Level premium
o High initial premium – premium significantly larger than that required to cover the cost of risk in early years
o Pre-funding: excess premium (in early years) is invested to fund the cost of risk in later years when the premium is insufficient to cover the risk - Compulsory premium growth
o Cheapest initial premium for a given cover level (benefit usually remain level)
o Increasing premium rates are priced into contract - Voluntary premium growth
o Automatic increase in premiums and cover to compensate for inflation
o Policyholder can at any time switch off the voluntary premium growth without penalty
o May contain a guarantee (or reasonable benefit expectation) that rates (i.e. relationship between premium increase and cover increase) will be the same as for new business
o anti-selection risk as better lives may switch off automatic increases and seek (cheaper) cover elsewhere
6
Q
Describe various premium reviews conditions included in risk products? (4)
A
- ASISA Code on Policy Quotations requires insurer to disclose the potential for premium reviews at time of sale
o Expect reviews –> disclose expected level of premiums
o Do not expect reviews –> disclose circumstances that would cause premium review - Types of review:
o Yearly renewable policies – patterns above are not relevant as premiums can be reviewed and changed annually, used for most products with a simple design
o Premium reviews expected – increase at regular intervals (e.g. every 5 years)
o No premium reviews expected (but premiums only guaranteed for a limited period) – only review where actual experience is materially different to pricing assumptions
7
Q
Describe waiver of premium benefits available on risk products? (2)
A
- Waives the premiums of the policy in case of pre-specified event
o (disability, death, retrenchment of specified life insured
o Life insured covered under premium waiver can be different from the life insured covered under the main policy
8
Q
Describe Critical illness benefits as well as the characteristics for the inclusion of critical illness benefit? (7)
A
- Hybrid product – non-indemnifying lump sum benefit payable when:
o Medical/CI Event (independent of extent)
o Reaching defined degree of impairment (e.g. ADL)
o Undergoing surgery (surgical procedure) - CI illness characteristics
o Perceived by public to be serious and occur frequently
If not life threatening, at least lifestyle-threatening
o Clearly defined – no ambiguity
Difficult – medical terminology
Tiered benefits also make difficult
o Sufficient data for pricing
o Avoid anti-selection
9
Q
Describe the needs that critical illness products meet? (6)
A
- Income can be provided from the lump sum via the purchase of an annuity when the individual cannot work as a result of their condition
- Medical costs can be funded such as treatment or expensive surgery
- Payment of mortgage of loan in the event when the policyholders health is in question
- Business partners can purchase critical illness on the lives of each other such that benefits will fund the buyout
- Recuperations needs after the illness example the installation of specialist equipment in their home
- A change in the claimant’s lifestyle e.g. moving to a less stressful job after a heart attack
10
Q
Describe the problems and complications of critical illness products? (6)
A
- Claim Definitions (complex & differ between insurers)
o ASISA has introduced SCIDEP (Standardised Critical Illness Definitions Project) covering cancer, heart attack, stroke and CABG at four severity levels
o Insurers must disclose the extent to which their product definition is SCIDEP compliant - Lack of transparency at claim stage due to:
o Exclusions
o Point-of-claim underwriting
o Actual condition covered (in policy) is more severe than the colloquial understanding of the term - New diseases must manage expectations of policyholders and distributors
o Include these at little or no extra cost in a “catch-all” condition for which policyholder can only claim once
o Difficult to allow in pricing reinsurer assistance - Medical advances unpredictable
o Trends in incidence for different for each different CI moving in diff directions future product incidence rates difficult to predict - Windfalls where lump sum exceeds the immediate medical costs or longer term loss in quality of life (but difficult to quantify) potential moral hazard
- Standalone death benefit is not priced into the product insurer must manage risk of paying a claim if the policyholder dies soon after the CI event
o Policyholder must at least survive the survival period (usually 14 days)
11
Q
Describe Permanente Disability Insurance? (3)
A
A lump sum non-indemifying benefit on a trigger event that can be:
- Occupational based
- Activities of daily living/activities of daily working
- Functional impairment and physical impairment
The cost of disability cover will depend on the definition of disability used
12
Q
Describe occupational based disability definitions?
A
Disability is established by the inability to carry out an occupation. This could relate to the inability to perform:
* Own occupation (not suitable where skills can easily be impaired)
* Similar occupations for which insured is suited that are incorporate the qualification (education), status and skills (training and experience)
* Any occupation
NB that results from experience monitoring feeds back into pricing as claims are effectively paid on a more generous basis than priced.
13
Q
Describe ADL based definitions? (6)
A
*The inability to perform a number of everyday tasks without assistance
ADLs as per ASISA standard critical illness definitions projects (SCIDEP) defs: feeding, dressing, washing, toileting, mobility, transfer
- Products often don’t use ADLs as only claim criteria
o ADL & ADW defs serve as underpin for disability and CI products
Advantages:
* Applicable to wider range of lives
o Including after retirement and self-employed
* Less subjective
* Only use one definition throughout policy term
Disadvantages:
* May be harder to satisfy this definition than the occupation-based one.
14
Q
Describe physical or functional impairment definitions? (7)
A
Physical impairment are usually clearly defined in policy documentation
e.g. loss of one or more limbs,
extremities and senses,
burns,
permanent confinement to bed or wheelchair,
facial disfigurement
or amputation.
Functional impairment is more expensive and also makes use of the ADLs.
15
Q
Describe Income protection products (8)
A
Income protection products also known as permanent health insurance (PHI) products replace the income that the insured with have earned if he/she become unable to work due to accident or illness (i.e. incapacity).
The benefit will be payable in the form of an annuity with payments ceasing on recovery, death or expiry of the policy.
The payments of benefits does not terminate the policy. Income protection will cover both temporary and permanent disability.
The claim definition will exclude:
* Early retirement
* Unemployment
* Injury caused by alcohol or drug abuse
* Self-inflicted injury/ attempted suicide
* Criminal activity
* War
* Not following medical advice
IP products are sold with a waiting period/deferred period i.e. the amount of time that the insured has to be fully or partially disabled before they receive benefit payments. The waiting period can rage form 7 days to 2 years
A policy may also include a linked claims period or “off period” which waivers the waiting period for a specified duration after a claim.
The benefit may be level or escalating with may be fixed or in line with inflation. The rate of escalation may be different inside and outside the claim period.
IP products also provide rehabilitation or proportion benefits to those who can work on a part time basis or in a less strenuous role.
16
Q
What makes a CI policy complex? (5)
A
- Varying levels of payout
- Exclusions and point of claim underwriting
- Complex disease definitions
- Non-standard definitions
- Definitions may require certain evidence.
17
Q
What is the purpose of survival periods for CI stand-alone products?
A
- Manages the risk that the LI will have to pay a claim if the PH dies soon after the CI event.
- Since death benefit is not priced into the stand-alone product
- Policy wording usually state that the PH must survive at least 14 days after the CI event to receive LS
18
Q
What is the purpose of survival periods for CI stand-alone products?
A
- Manages the risk that the LI will have to pay a claim if the PH dies soon after the CI event.
- Since death benefit is not priced into the stand-alone product
- Policy wording usually state that the PH must survive at least 14 days after the CI event to receive LS
19
Q
Needs that are met by CI policies
A
- Repay debt when PH’s health is in question (mortgage/other loans)
- Recuperation/rehabilitation after CI, taxation planning, medical aids (e.g., install specialist equipment)
- Medical costs when surgery/other expensive treatment needed
- Income from the LS via an annuity when PH cannot work as a result of CI (fund loss of earnings)
- Lifestyle changes where necessary to improve claimant’s health (e.g., move to less stressful lower paying job after CI)
- Keyman cover - buyout stake in partnership when CI arises (partners buy CI policies on each other)
20
Q
Major criticism of occupational definitions for permanent disability cover
A
It cannot be applied to self employed home workers, those not in employment or those past the retirement age.
21
Q
Risks of IP/PHI products
A
- Risks of SA risk products in general also relevant for IP products.
- Morbidity risk: Risk of greater than expected claims, which could be due to:
- Higher inception rates than expected
- Lower recovery rates than expected - Administration, underwriting, claims management more complex than for other LI products
- Anti-selection
- Expense risk
- Moral hazard
- As the claimant might not notify the insurer of recovery
- From the insurer’s perspective it is difficult to monitor each individual case
22
Q
Describe Key Person Insurance
A
- Insurance policies are “employer-owned” policies
- Typically purchased to protect employer in the event of death, disability or severe illness of a key individual. - Important for business profitability
- Employer options after the loss of a key individual:
- Find suitable replacement
- Up-skill another employee
- Change the business model
- Consider winding up the business - Value of benefit should represent financial loss suffered by employer
- Additional expenses + lost profits - Additional uses of KP insurance:
- Repay debt
- Buyout shareholding of diseased partner - Various tax treatments:
- Depending on policy structure (actuary should consult tax expert when designing policy)
23
Q
Describe Credit Life Products
A
Customers of consumer goods may require finance to purchase these goods, especially if they are relatively expensive.
- The institution providing the finance wishes to reduce the risk of default if the borrower were to die/become disabled.
- Finance company would usually make it a condition of the loan that the borrower obtains a policy covering the outstanding amount of the loan over the repayment period.
Note that credit life policies are also sold in large quantities in the micro-loan industry.
The National Credit Act (NCA) took effect August 2017 (affects credit agreements concluded after this date).
24
Q
Regulations of Credit Life Products
A
- Single premium cannot be added to the initial loan consideration and repaid in instalments over the term of the loan (often used to happen prior to the NCA)
- Prescribes maximum charge for credit life insurance
- Prescribe minimum benefits that must be offered to consumers.
- Prescribed limitations/exclusions that apply to the insurance cover
- If the consumer dies/becomes permanently disabled - outstanding balance of the consumer’s debt must be settled
- If the consumer loses job/becomes temporarily disabled - the policy will pay instalments due under the credit agreement for up to 12 months.
- If a consumer is not employed when entering the contract, consumer cannot be charged for retrenchment cover.
25
Risks to the company of credit life insurance
1. Limited medical information provided at application stage
2. Potential for AS immaterial
- Since usually sold as secondary policy as part of the application for finance
- Small SA
3. Early loan repayment - If the policy has a level premium for the full term (due to decreasing SA)
4. Cross subsidisation - Premiums are normally banded by age and cross subsidisation takes place within age bands
5. Profit share risk - There is often a profit share agreement with the finance provider
6. Reputational risk
- Greatly reduced by the introduction of the credit life insurance regulations that increase consumer protection.
26
Describe Funeral Assurance
1. Provision of sophisticated and expensive funerals is part of South African culture.
2. Provides amount of money in the event of the death of the PH or a member of his family
3. Small SA, however, there is a need to pay the benefits quickly after the death has been notified
4. Generally these policies are sold as TAs.
5. Simple products, with low minimum premiums and little/no underwriting
6. Often have short waiting periods (<6 months) where only accidental death is covered.
7. Tombstone benefit - paid out up to one year after death to cover the cost of a tombstone
8. Often sold by funeral parlors and retailers
9. Often classified as "funeral business" ito Insurance Act 2017.
- Specifies the max SA of R100000
- NOT subject to the commission restrictions imposed by the Act on other individual business
- LTIA places limits on lives of children (due to MH)
27
Risks of Funeral Assurance Products
1. Fraud - due to speed claims have to be paid
2. Mortality risk - need to include AIDS in assumption
3. Expense risk
4. Premium collection:
- Difficult given the relatively small premiums
- Therefore often marketed through employer groups or on a group basis.
28
Describe South African Investment Products in General
1. Sold under a life license
2. Investment products can be split into two types:
- Endowments
- RAs
PHs can usually choose one or more of the following types of underlying portfolios:
- Market-linked (with or without guarantees)
- Smooth bonus
- Guaranteed product
Unit funds exist for products invested in market-linked and smooth bonus portfolios.
29
Investment guarantees on market-linked portfolios
1. Generally, have certain guaranteed minimum benefits, while PH participates in potential upside
2. Typically: maturity or death benefits will be the larger of the fund value and minimum guaranteed value.
30
Features in which investment products are flexible
1. Term of the policy
2. Premium frequency
3. Premium paying pattern
4. Paid up policies
5. Premium size
6. Premium waiver
31
Effective Annual Cost (EAC) measure
Developed by ASISA to promote treating customers fairly.
This is a standardized disclosure methodology of the charges that an investor will most likely incur when investing and holding a specific financial product.
Introduced to allow investors to compare charges and their impact on investment returns.
Places investors in a position to make better informed decisions around retail savings and investment product choices.
As part of disclosures, charges are:
- Shown as annualized percentages
- Split into 4 components (investment, advice, admin, other)
32
Risks to the company of Investment Products
1. Market risk (arises because A values can fall below the actuarial value of the L):
- Market linked portfolio with guarantees
- Smooth bonus portfolio
- Guaranteed product
Mechanisms that can be used to limit market risk:
- MVA
- Asset choices
- Bonus Stabilization Reserve (BSR)
- AL strategy
2. Expense risk
3. Withdrawal risk (when the AS < withdrawal benefit)
33
Features of RAs
1. Income Tax Act defines RA as a retirement fund other than a pension or provident fund, which has been established to provide retirement and/or death benefits to individuals and their dependents.
2. These funds enjoy various tax benefits.
3. An RA fund is established as a scheme with a board of trustees and a set of rules.
4. Benefits promised by schemes are usually purchased from a LI, which would then also administer the fund.
- Benefits may not be ceded
- Benefits may not be assigned
- Benefits may not be paid out as cash surrender benefit
5. RAs are similar in form to an endowment assurance
- Maturity benefit is used to buy an immediate annuity (i.e. underlying contract is NOT annuity)
6. An RA is an individual contract which can be purchased by the employee directly.
7. RAs may be sold with a guaranteed annuity option
34
Describe Universal Life Products
1. Combine risk cover with an investment component
2. LIs have recently stopped selling these products and the trend is to sell unbundled policies.
- Used to be popular in the 1980s and 1990s
- Lacks transparency, which makes it difficult for the PH to see:
* How much is paid for the risk element
* How the investment returns compare to other savings vehicles
- Trend today is buy separate risk and savings products
3. Universal Life products can be seen as:
- THE UL versions of:
* WLA with SVs
* EA with significant death benefits
- RAs with cover
* Even though these policies are sold in a universal life wrapper, the tax treatment of proceeds from RAs is different than that if EAs.
35
Risks of universal life policies to the insurer
1. Main risk: SA selected or the return on the I portfolio results in a negative monthly investment.
- Will finally result in the elimination of the investment component of the policy.
- Under this situation, premiums become insufficient
* Premiums paid will not be sufficient to pay the cost of risk cover each month, and the company will have to carry the loss.
- The risk is managed by:
* The imposition of maximum SA
* Premium reviews
2. Underwriting risk (e.g.: mortality, morbidity, disability risks)
- These risks are reduced by this product:
* Practice is not to guarantee the risk premium rates used in the calculation of the cost of cover
* An increase in the risk premium rate will, however, increase the possibility of the policy moving into a negative monthly investment situation
3. Anti-selection risk arises when the PH has the option to increase the SA at any point in time
- The risk is reduced by requiring evidence of good health or additional u/w
- This is different from future cover option where no evidence of good health is required. This cost of future cover options should allow for the possible anti-selection.
36
Risks of universal life policies to the insurer
1. Main risk: SA selected or the return on the I portfolio results in a negative monthly investment.
- Will finally result in the elimination of the investment component of the policy.
- Under this situation, premiums become insufficient
* Premiums paid will not be sufficient to pay the cost of risk cover each month, and the company will have to carry the loss.
- The risk is managed by:
* The imposition of maximum SA
* Premium reviews
2. Underwriting risk (e.g.: mortality, morbidity, disability risks)
- These risks are reduced by this product:
* Practice is not to guarantee the risk premium rates used in the calculation of the cost of cover
* An increase in the risk premium rate will, however, increase the possibility of the policy moving into a negative monthly investment situation
3. Anti-selection risk arises when the PH has the option to increase the SA at any point in time
- The risk is reduced by requiring evidence of good health or additional u/w
- This is different from future cover option where no evidence of good health is required. This cost of future cover options should allow for the possible anti-selection.
37
Describe annuity products
1. Contracts that pay out regular amounts in exchange for a single premium
2. Two main categories of annuities in SA:
- Traditional with-profits or non-profit annuities
- Living annuities
38
4 Groups of Traditional Annuities
1. Single Life annuity
- Payments continue while PH is alive
- Can be sold with or without a guaranteed period
2. Joint Life Annuity
- Payments continue while PH or spouse is alive
- Can be sold with or without a guaranteed period
3. Temporary annuity
- Payment continues while PH is alive within a specified period
4. Term certain annuity
- Payments continue for specified term, independent of whether PH alive or not
39
Distinction between compulsory and voluntary annuities
1. Source of money used to purchase annuity determines whether annuity is compulsory or voluntary
2. Annuity purchased from a pension, provident or RA fund => compulsory annuity
40
Living annuities
1. Used to purchase an income for a retiring member of a pension, provident or RA fund.
2. Also known as "equity-linked life annuities" (ELLAs)
The appeal of the product is that:
- The capital will not be lost on early death as would happen with conventional immediate annuity
- Annuitant can invest in assets which may outperform fixed interest rate securities over the long term
- Drawdown can also be changed regularly to better suit needs
41
Risks to the company of living annuities
1. No mortality, interest rate or investment risk to the insurer
2. Reputational risk
3. Expense risk
42
Conventional with profits products
- Contracts where benefits are initially set at the start of the contract based on the premium paid
- Additional benefits may be paid on top of base benefits if investment returns have been sufficient
* Function of reversionary and terminal bonuses
-NB: Generally old generation products and are not sold anymore, but significant number as still on books.
43
Describe a group life contract as well as the different structures of group cover? (7)
Group business refers to insurance where a policy is issued to a policyholder other than an individual to cover a group of persons (identified by reference to entity buying the contract)
Examples: trade unions, professional bodies, borrowers from credit institutions, clients/ account holders of retail stores
Employee benefits = group products sold to a group of employees
Membership is usually compulsory
Employee benefit structures:
* Employer takes out group policy directly
* Employer establishes a retirement fund (pension or provident fund) – can offer certain risk benefits
* Umbrella funds: retirement funds that pool the retirement investments of multiple, unrelated employers into a single legal structure
44
List various group risk products? (8)
- Death benefits (group life assurance, GLA) – member
- Spouse’s death benefit
- Spouses and children annuities
- Income protection
- Disability (lump sum)
- Critical illness (lump sum)
- Funeral benefits
- Credit life – purchased by banks / credit institutions
45
Describe the features of group risk products? (10)
(Comparison between employee risk benefits and individual business)
* Premiums and benefits usually expressed as % of pensionable salary
o benefits increase in line with salary – but may be capped
* Limited choice, can only be amended at certain times or on certain life events
* Simpler to enable bulk administration
* No underwriting for cover below free cover limits
* Pre-existing conditions may be excluded for new employees joining the group
* Premium rates are determined for a group as a whole
o Not guaranteed for more than 1 year and reviewed regularly
o Based on claims experience for large groups
* More cross-subsidisation than indiv
o rates often not distinguished by gender or age
* Less administration than for multiple individual policies – to enable bulk administartion
* Continuation option (often includes)
* Income protection benefit differences
* Taxation of a group scheme depends on the tax status of the scheme
* Profit share arrangements sometimes exist where the employer shares in the underwriting profits
46
Describe the features of group income protection benefits? (4)
* Waiting period is of similar duration to the sick leave
* First two years:
o Monthly disability income = 100% of pensionable salary
o Inability to perform one’s OWN occupation
* After two years:
o Monthly disability income = 75% of pensionable salary
o Inability to perform one’s own or a suitable ALTERNATIVE occupation
o reassessment of disability after 24 months
* Pension fund contributions continue while claims are in payment
o Member contributions - deducted from disability benefit
47
Describe the taxation of group schemes? (4)
* Approved scheme:
o Requirements:
scheme must contain an element of retirement funding
approved benefits can only cover the employee and not his family members
o risk premiums are tax deductible while benefits are usually taxed
* Unapproved scheme:
o Risk premiums form part of taxable income but the lump sum benefit paid out is tax free
48
Describe the additional risk associated with group cover? (5)
* Anti-selection risk is reduced where membership is compulsory
* Mortality risk is
o increased – free cover limits
o reduced – frequent premium reviews
* Concentration risk by geographical location
* Anti-selection risk associated with a continuation option. Initial pricing of benefit may underestimate:
o Take-up of option
o Experience of lives that take up the option
* Moral hazard (w.r.t income protection) where the employer might dismiss an employee on false “medical” grounds when the employee would have been dismissed anyway
* Highly competitive market in which brokers can re-broke schemes on a yearly basis extremely tight margins
o possible loss of business where competitors are prepared to write the business at a loss
49
How can life insurance companies be involved with a pension fund? (3)
1. Administration of pension and provident funds
2. Offer investment portfolios to pension or provident funds
3. Offer insurance (risk or annuity) products to pension or provident funds
50
Describe the features of group pension and provident funds? (10)
* Benefits may be payable upon:
o Withdrawal (upon leaving employer)
o Retirement
o Insured events (e.g. death)
* Possibilities for withdrawal benefit:
o Transfer to pension / provident fund
o Transfer to new employer’s pension / provident fund
o Purchase retirement annuity
o Cash as taxable lump sum BUT under investigation by National Treasury
- Contributions are made by both employers and employees (usually)’
- Tax incentives exist for contributions
- Board of trustees in place
* DC fund: employee can choose and investment portfolio for their retirement savings
o Available funds are approved by the board of trustees
* Pension fund: two-thirds of benefit must be used to purchased annuity only one third as cash
* Provident fund: full benefit may be taken as cash
o BUT under investigation by National Treasury
o Expect treatment of various retirement benefits will be standardised
* Regulation 28 limits the extent to which retirement funds can invest in particular assets or asset classes to protect investors from:
o Poorly diversified portfolios
o Over-exposure to higher-risk asset classes
o Complex financial instruments
51
Describe the risk in group retirement products? (3)
* Key risk: operational risk associated with administration-intensive environment of retirement funding
o Incorrect investment of member’s contributions potentially high losses
-Expense risks for admin
-Market risks same as before
52
Define Micro-insurance? (4)
* International association of insurance supervisors (IAIS) definition:
insurance that is accessed by low-income populations,
provided by a variety of entities,
but run in accordance with generally accepted insurance practices
* Low premiums and low sum assured
* Usually risk benefits as opposed to savings benefits
o life business and certain classes of non-life business
* Viewed as a mechanism to help alleviate poverty and promote financial inclusion
53
Describe the background to micro-insurance regulation? (7)
In August 2011 regulatory framework developed by the national treasury including the following objectives:
* Formalise currently informal providers
o promote regulated and well-capitalised insurers
o small business development
* Lower barriers to entry broader participation support poverty alleviation:
o Economic growth and job creation
o Increased access to protection against losses
- Enhance consumer protection in this market segment through prudential regulation
- Ensure effective supervision and enforcement, thereby supporting the integrity of the insurance market as a whole
The regulatory approach set out in the national treasury micro-insurance policy was used to updated:
- Micro-insurance provisions in the Insurance Act 2017
- Micro-insurance prudential standards
- Amended policyholder protection rules (long-term insurance Act)
54
Describe micro-insurance products in South Africa? (4)
* Well-developed types:
o Funeral cover
o Credit life policies on consumer goods and micro-loans
* Not well-developed types:
o Health micro-insurance – demarcation between health insurance policies and medical schemes in RSA has limited activity here
o Non-life insurance (e.g. agricultural insurance)
55
Describe the service providers of micro-insurance in South Africa under various Acts. (3, 10)
* Co-operatives Act:
o Burial societies offer non-guaranteed funeral benefits to their members and their dependants
o Benefit size limited to R20 000.
o Maximum 2500 members
o No regulated by PA and FSCA
* Friendly Societies Act
o Friendly societies offer guaranteed funeral benefits up to a maximum of R15 000.
o Sometimes need annual actuarial valuation & actuarial scrutiny of benefit/ premium changes
o In future may be required to operate under co-operate Act or Insurance Act 2017
* Insurance Act 2017
o Max R100 000 for each life assured for life micro-insurance and accident and health non-life insurance (GOM)
o Max R300 000 for the policy for non-life micro-insurance excluding accident and health’ (GOM)
o Max R100 000 per life for funeral business under a life licence (GOI)
56
Describe the amendment to the policyholder protection rules in LTIA for micro-insurers? (6)
- The term of micro-insurance products are limited to 12 months (not applicable to funeral polices)
- Policy benefits must be defined by a sum assured (rather indemnity)
- Waiting periods may not exceed one quarter of the term of the policy
- There are limitations on exclusions that may be permitted (Exclusions for pre-existing conditions are not permitted)
- Valid claims must be received within two days of full documentation
Micro-insurance business is less restricted by commission regulations and lighter FAIS Act requirements.
57
Describe the responsibility of the head of actuarial function according to the governance and operational standards for micro-insurers? (8)
* Expressing an opinion on the adequacy of the calculations for the micro-insurers technical reserves and minimum solvency capital requirements including:
o Appropriateness of methodologies and underlying used and assumptions made
o Sufficiency of the quality of the data used in the actuarial calculations
o Best estimates and associated assumptions against experience when evaluating technical provisions
o Accuracy of the calculations
* Evaluating and providing advice to the board of directors, senior management and the control function on
o the actuarial soundness of product development and design,
o including the terms and conditions and premiums,
o insurance obligations and other values
o and the estimation of capital required to underwrite products
58
Describe the prudential standards regarding the valuation of assets, liabilities and capital requirements for micro-insurers?
Assets are restricted to cash and cash equivalent (with possible exemption) and must be valued at market value (market consistent valuation)
Technical provisions are calculated using a formula based approach comprising of the following:
* Unearned premium reserve (UPR)
* Outstanding claims reserve (OCR)
* Incurred but not reported reserve (IBNR)
* Unexpired risk provisions (URP)
Minimum solvency capital requirement is the maximum of R4 million or 15% of net written premiums in the prior 12 months
FSM1 and FSM2
59
Describe the regulatory reporting for micro-insurance required under different Acts? (3)
Insurance Act 2017
Micro-insurers are required to submit regulatory reports to the prudential author and financial services conduct authority
Friendly society Act
Business defined in the rules of the friendly society requiring actuarial scrutiny or required by registrar
Co-operative Act
Micro-insurance written under the co-operative Act does not have any regulated actuarial involvement.
60
Describe the key risks involved in writing micro-insurance products? (6)
* Volume and Expense risk:
o Small contract sizes must be sold in large volumes to recoup costs of distribution and administration
o Expenses also make up a large proportion of the premiums and needs to be monitored
* Persistency risk:
o Lower income market premiums harder to afford (especially in poor economic conditions)
o Mitigation: allow certain number of missed premiums, arrange automatic premium deduction from wages
* Underwriting risk increased by:
o (1) anti-selection risk lack of underwriting (medical & financial)
o (2) Business mix list lack of differentiation by age or gender
o (3) Additional lives (family members) covered
o Mitigation: revise (reviewable) premium rates, the sum assureds are small which limits concentration risk, essential risk is appropriately priced
* Operational /Fraud risk:
o Benefits are paid within a few days/hours after receipt of claim form and death certificate
o Claims amounts are small not cost effective to investigate all
o Limited info on additional lives covered
o Mitigate: focus on syndicated fraud where accumulated losses are significant and using analytical techniques for proactive fraud detection
o The volume of business administered may result in failures of internal controls
* Regulatory risk:
o High costs of meeting the requirements are difficult to cover in the low premium environment
o BUT new micro-insurance regulation Insurance Act allows for lighter regulatory requirements
* Marketing and reputational risk
o High lapse rates combined with waiting period means that policyholder’s may be paying premiums for limited cover
o Relatively low financial sophistication which results in additional care in communicating benefits and restriction
* Market risk: Limited, given the:
o Short term of policies
o Requirement that assets be invested in cash or near cash instruments
o There is no risk based capital requirement for market risk in the regulatory capital requirement
61
Unearned Premium Reserve (micro-insurer)
1. The UPR is the sum of all premiums (adjusted for policy refunds, reinsurance premiums paid, net commission and outsourcing fees payable) to be paid over the remaining term of the policy at the valuation date.
2. This must be calculated on a per policy level
3. Formula used is set out in FSM2 (methodology is different to 'traditional' UPR)
62
Outstanding claims reserve (micro insurance)
1. The OCR is an estimate of the amount payable on incurred claims which have been reported but not yet fully paid, less the expected reinsurance recoveries.
2. OCR must be calculated using a market consistent approach based on either actuarial judgement or statistical evaluation of historical losses.
3. For annuities the OCR is the sum of all expected future payments
63
Incurred But Not Reported Reserve (IBNR) (Micro insurance)
1. The IBNR is an estimate of the amount that will become payable in respect of claims that have been incurred but not yet reported.
2. The IBNR is at least 7% (or any other % or method approved by the PA) of the total premiums payable to the Micro insurer for policies written 12 months before the calculation date, less the reinsurance premiums payable for the concerned policies
64
Unexpired Risk Provision
1. The URP is also known as the additional unexpired reserve
2. It is the amount required to cover the excess of the reserve required to cover the expected claims and expenses, over the UPR.
3. Consequentially it can only be used when the UPR is deemed to be insufficient to cover the expected claims and expenses from the unexpired risk.
4. The calculation must be done for the total premium reserve less the UPR
5. Must be calculated using a market consistent approach based on either actuarial judgement or statistical evaluation of historical losses.
65
Why is additional care in communicating policy benefits and restrictions necessary for micro insurance products
1. Low financial sophistication and education levels of many customers
- Ability to misunderstand the policies, value propositions and the impacts of waiting periods
F202
flashcards
Decks in class (6)
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