F_Extras

Question 1

Large mutual, mainly with profits business - reinsurance needed?

Answer 1

• High level of free assets
• With mainly with profits written , the insurer has the ability to absorb high mortality risk and new business strain financing can be done from their own resources
  o E.g. mortality fluctuations reserve, free assets or decreasing bonuses
• Risk premium reinsurance without financing commission and relatively high M
  o Protects bonuses from mortality risk
  o Financial strength implies no need for financing (additional financing)
• Catastrophe cover will also be needed

Question 2

Large pty limited, rapid expansion, declining free assets - reinsurance needed?

Answer 2

• Reinsurance required must reduce the financing requirement
• Finre is based on the large portfolio size (in force book)
• Risk premium reinsurance with financing commission with M set to reduce new business strain but not give away large profit
• Catastrophe cover also needed since free asses are reducing
• Reinsurance helps reduce capital requirement and increases insurers return on capital
  o Stop loss reinsurance
  o Assumption swap
   Here the reinsurer pays the insurer the difference between A&E if A>E

Question 3

New unit linked company, limited capital resources- reinsurance needed?

Answer 3

• Low retention limit needed
• Reduced new business strain needed
  o Insurer is then empowered to grow faster and reach critical mass without the financial limitations of its own capital
• It needs to build up capital base through retained income
  o Use risk premium reinsurance
  o Original terms not the norm as reinsurer cannot match the investment returns
  o Investment risk already passed from the insurer to the e policyholder
   Thus no need to reinsure this risk
• Risk premium reinsurance is combined with financing commission in order to reduce new business strain
• Reinsurance can be
  o Quota share
  o Low retention individual surplus
  o May include catastrophe cover

Question 4

sources of medical health for health underwriting

Answer 4

o Questions on a proposal form completed by applicant
o Reports from medical doctors consulted by the applicant
o Medical examination done by a doctor or nurse
o Specialist medical tests

Question 5

Why with-profits products?

Answer 5

It meets the needs of clients who want exposure to some risk but also need some security.

It also assists life companies to manage their risk and capital requirements better if they can manage the extent of deferral of bonus and hence the size of the guarantees that they need to keep capital for.

Question 6

Proportional vs. Non-Proportional reinsurance

Answer 6

• Proportional: Quota Share and Surplus
• Non-proportional: XoL
• Catastrophe and Stop Loss main types of XoL

Question 7

Reinsurance Examples

1. Established mutual company with mainly with-profits business

Answer 7

If high free assets:

• can absorb mortality risk and finance new business strain from own resources;
• will want high retention to avoid giving away too much profit;
• original terms unlikely as reinsurer will need to match bonus rates;
• likely to have risk premium,
• no financing commission with high retention (lower if low free assets);
• even if need for reinsurance is low,
• might need help setting premium rates and for pricing of special risks; catastrophe cover may be required.

Question 8

Setting Assumptions General Framework

Answer 8

• Analyse historic experience.
• Adjust for trends and expected differences in future experience & product structure.
• Add margins for uncertainty, adjusting for credibility of data.

Question 9

Margins - assumptions

Answer 9

• should be allowed for to manage the risk of adverse differences in actual experience compared to the best estimate assumptions.
• If using a cash-flow model, margins may be allowed for in the RDR, using a stochastic approach or by adding a margin to expected values.
• If using a formula approach, only the third option above is suitable, judgment is needed

Question 10

Factors in product design

Profitability

Answer 10

Premiums should cover claims, expenses and provide a profit margin.

Question 11

What basis are units prices if a net seller of units? What does that mean for the bid/offer price?

Answer 11

Bid basis

Find bid and offer using expropriation price

Question 12

If company a net seller, what basis will it use, what’s the formula for offer price and bid price.
What about if it’s a net buyer?

Answer 12

Bid basis:
Offer price: (buying)
Expropriation price PLUS initial charge (bid-offer)
Bid Price (selling)
Expropriation price

Offer basis:
Offer price: (buying)
Appropriation price plus initial charge (bid-offer)
Bid Price (selling)
Appropriation price

Question 13

Explain what actuarial fund does?

Answer 13

Allows us to hold the present value of the unit fund

Question 14

Explain the actuarial funding factor formula?

Answer 14

Unit fund at t * A(x+t:n-t)
ie. PV of current unit fund paid at death
T=0 normally

Question 15

What formula shows the amount transferred to non-unit fund using actuarial funding

Answer 15

UF(0)*(1-A(x:n)) is transferred to the unit fund

ie. Difference between original unit fund and the PV of it

Question 16

Give an alternative to actuarial funding factor that takes credit for future charges, what loan does it represent

Answer 16

Negative non-unit reserves

One from policyholders with positive non unit reserves repaid on future emerging profits

Question 17

Give 3 constraints to negative non-unit reserves

Answer 17

Sum of all non-unit reserves >= 0
Sum of unit and non-unit reserve on policy >=guaranteed SV
Future profits must arise to repay loan

Question 18

What risk is transferred BACK to company by guaranteed (maturity, surrender or annuity option), why?

Answer 18

Investment risk, attractive

Question 19

What 2 guarantees are attractive on traditional policies?

Answer 19

GAO

Guaranteed minimum maturity value on EA

Question 20

What’s the difference between risk of guarantees in a traditional policy or non-traditional policy

Answer 20

Company has no control over investment policy in non-traditional