product design considerations

Question 1

list the 16 product design factors/ considerations.

Answer 1

1. Meeting the consumer needs
2. Profitability
3. Marketability
4. Competitiveness
5. Financing requirements
6. Risk characteristics
7. Onerous of any guarantees
8. Sensitivity of profit
9. Extent of cross-subsidies
10. Administration systems
11. Consistency with other products
12. Regulatory requirements
13. Sustainable investment options
14. Interaction of product design factors
15. Distribution channel
16. Bonus distribution philosophy
17. small alterations

Question 2

The mnemonic device to remember the first 14 design factors

Answer 2

My Playful Monkey Climb Fast, Racing Over Silly Elephants And Crazy Rhinos, Creating Inspiration

Question 3

Meeting needs

Answer 3

mention needs met by the new product
If not met, the company will battle selling this product and may never recoup expenses invested in designing the product.

Question 4

profitability

Answer 4

• the company will want rates( premiums or charges) that will be sufficient to cover the benefit, expenses in the most foreseeable circumstances, and the profit margin.
• This profit may be from the expense, savings and mortality.

For unit-linked contracts:
- ensure that overall the charges will be sufficient to cover the expenses to be incurred and provide a profit margin.

with unit-lined it is just the expenses, the benefits are related to the bid value.

Question 5

sensitivity of the profit

Answer 5

Factors that influence profit sensitivity
- Expenses
- mortality and contingent events
- investment returns
- withdrawals

unit linked funds, can remove the design factors that allow for those to happen such that the investment risk majorly lies with the policyholder.

Question 6

How would you deal with the factors that affect the profit sensitivity of the unit-linked product?

Answer 6

• Investment return:
  If there are no investment guarantees then most of the investment risk is borne by the policyholder.
• Mortality:
  Make the charge for this variable at the company’s discretion.
• Expenses
  Make the charge for this variable at the company’s discretion.
• Withdrawal rates
  Don’t offer any guaranteed surrender values.
  Offer a claw back commission system
• Matching
  try to match income (the charges) with outgo (expenses and benefit costs) as closely as possible by duration, especially with regard to the initial expenses.

Question 7

financing requirements

Answer 7

The company has desire is to minimise the financing requirement concerned through benefit and charges designs.

Consider
- Does the nature of the contract require low or high initial expenses ( Underwriting expenses, admin )
- The level of any regulatory or internal solvency capital required should be considered.
- Consider how the bonus philosophy will influence the capital requirements.
- Consider the level of free assets and the impact of new business strain on it.

• Guarantees may require reserves and thus increase financial strain.

Question 8

How do unit-linked offer less financing requirements? Why are they suitable for new businesses.

Answer 8

• no (or few) expense guarantees
• no (or few) mortality guarantees
• no (or few) investment return guarantees /
• possibly a smaller supervisory solvency margin requirement.

Question 9

Onerousness of guarantees

Answer 9

• Mention the guarantees in the product
• The rate of bonus declaration of the implored bonus philosophy
• Consider the level of any guaranteed surrender(with respect to Ast)/maturity values, or annuity options.
• They are only onerous if they cannot reduce their financial impact, e.g. by immunization or by matching the onerousness may be reduced.
  Problems with guarantees
• possibly having to suffer a cost that you did not fully expect; and,
• possibility of having to reserve for it and thus increasing the capital strain.

Question 10

Distribution channel

Answer 10

The distribution channel involved will have a fundamental influence on what product is
required,
- how it should be structured,
- and how it should be priced.
If intending to market the same product through more than one channel, the company will need to decide whether to:
- apply the same pricing to all channels,
- or to price differently for different channels (an approach known as “dual pricing”).

Question 11

Risk characteristics

Answer 11

Consider
- the acceptability of the level of risk associated with a proposed contract design.
- This will depend on the risk appetite and willingness/ ability to reinsure it
- May accept well-studied and quantified risk at industry and company level in full, e.g. mortality risk.
- Risks from using a new distribution channel and thus a large mortality parameter risk
- Reinsure large part of the risk
- Incorporate margins
- Offer the contract as an additional option instead of a stand-alone.

Question 12

Competitiveness

Answer 12

• design, price and bonus rates of competitors are key influences.
• Products need to be competitive in their respective markets and if they have other coompetitors.

Unit-linked products
- structure and level of charges do not depart far from those competitors, depends on market.
- Level of expense charges and how price-sensitive the distribution channel is.
- E.g. for IFA margins may be added on the charges the charges, so that
-

Question 13

Extent of cross subsidies

Answer 13

• A company needs to decide on the extent of any cross-subsidies between for example large and small contracts.
• The marketing advantage of a simple premium or charging structure may conflict with a desire to avoid cross- subsidies.
• Underprice small contracts and overprice the large contracts,
• because small contracts may turn to be expensive and thus not marketable if they were to use a fairly charging structure(fully cover their marginal costs).
• To what extent can a company subsidise expense overrun from interest, and other, profits

Question 14

Administration systems

Answer 14

• The system requirements of a new product may limit either
• the benefits to be provided or
• the charging structure to be adopted.
• Consider the benefit and cost of foregoing a particular feature and enhancing the system.
• Simple systems are compatible with simple products.

Question 15

regulatory requirements

Answer 15

• A company must adhere to any regulatory requirements,
• eg maximum (capped) charges, treating customers fairly.

Question 16

Sustainable investment options

Answer 16

• ESG considerations, workplace conditions, how markets and p/hs react to these and they also influence the design of investment strategies

Question 17

consistency with other products

Answer 17

The company may wish to ensure that the charging and benefit structures of a new policy are at least similar to any existing business.
- The differences to the existing products should be justifiable and marketable.

These factors are not necessarily independent, in that meeting one may
prejudice the meeting of another, and so a compromise will usually need to be
reached. Also, the factors are not necessarily mutually exclusive.

It is the job of the “marketing actuary” to design a product, with the aim of giving the
“optimal” compromise between the factors set out in this chapter.

Question 18

interaction of design factors

Answer 18

These factors are not necessarily independent, in that meeting one may
prejudice the meeting of another, and so a compromise will usually need to be
reached. Also, the factors are not necessarily mutually exclusive.

It is the job of the “marketing actuary” to design a product, with the aim of giving the
“optimal” compromise between the factors set out in this chapter.

Question 19

Marketability

Answer 19

Products need to be marketable through their respective distribution channels,

and thus it is also important that they meet their needs and provide value for money.