Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

2022: CP1 A311 Actuarial Risk Management > Chapter 23: Contract design > Flashcards

Chapter 23: Contract design Flashcards

1
Q

Who are the parties involved in contract design?

A
  1. Providers + their customers: Require contracts that meets their needs and their customers’ needs in a cost-effective way.
  2. Actuaries: Pricing and provisioning on new and existing contracts
  3. Lawyers: Drafting contracts that ensure clear wording and the provider is not exposed to unnecessary risks
  4. Accountants: Account income and outgo
  5. Financial backers: Return on capital compensating them for the risk taken through regular reports
  6. Administrators
  7. Sales and marketing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What influences the needs of a provider and their customers??

A

Providers:

  1. Chosen market
  2. Capital available
  3. Expertise available
  4. Liquidity
  5. Risk appetite

Customers:

  1. Capacity to pay
  2. Risks to be covered
  3. Attitude to risk
  4. Benefits needed through time
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What to consider surrounding benefits when designing a contract

A

Benefits have to meet the needs of the provider and their customers

Consider the:

  • Level of the benefits: constant, increasing or decreasing over time
  • Form of the benefits: lump sum or regular
  • Guarantees: e.g., guaranteed maturity values
  • Options: e.g., option to renew, convert or cancel
  • Discretionary benefits
  • Investment type: without/with profit or unit-linked
  • Discontinuance benefits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the usual discontinuance benefits under:

  • Life insurance products
  • General insurance products
  • Benefit schemes
A

Life insurance considers:

  • Market practice
  • Regulation
  • Discontinuance can mean surrender, lapse, paid-up state
  • Policyholder expectation
  • Fair to policyholders, remaining policyholders and providers of the benefits
  • Possible selective withdrawal

General insurance
* Usually outstanding payment - admin cost

Benefit schemes

  • DC: Reflects member’s account at the date of withdrawal. Ths account will continue to grow with investment return less any charges up to retirement
  • DB: Number of years’ service and the pensionable salary at the date of withdrawal increased at some low rate (usually price inflation) until retirement
  • Can stay in the scheme or transfer to a new scheme
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the difference between surrender, lapse and a paid-up state

A

Surrender: The policy stops, there is no further cover, no further premiums are paid and the policyholder receives a lump sum payment

Lapse: The policy stops, there is no further cover, no further premiums are paid and no payment is made to the policyholder by the insurer

Paid-up: The policyholder ceases to pay premiums but the policy continues to offer the policyholder some cover. The cover is reduced to reflect that there are no more premiums

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What to commercial considerations to consider when designing a contract

A
  • Profitability (claim experience, expenses, inflation, investment returns, withdrawal experience, new business volume and mix)
  • Marketability (simple to understand design, options, guarantees, low charges)
  • Competitively priced
  • Regulation (cooling off periods, product features, min/max price/expenses, discontinuance terms, disclosure of information)
  • Tax
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What to consider under financing when designing a contract

Life insurance

Benefit schemes

A

Financing has to do with the timing as to when money is set aside to pay for the benefits:

Benefit schemes

  • PAYG (unfunded: monies only set aside when benefits fall due)
  • Lump sum in advance (funded, funds are set aside when the benefit is promised)
  • Regular payments (funding, building up a fund)
  • Terminal funding (funded, funds set aside when benefit event happens, buying an annuity at retirement)

Life insurance contracts

  • When insurance contracts are written the providers are required to set aside an amount of capital: regulatory capital.
  • The capital requirement increase based on the riskiness of the contract, any options or guarantees and the complexity of the contract
  • Without profit tends to be more capital intensive than with profit or unit-linked
  • Insurers should also consider any new business strain: loss in the first few years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What practical considers to consider when designing a contract

A
  • Simple to understand
  • Simple to administer (either internally or externally)
  • Consistency with other contracts the provider provides since this cuts down on administration and training costs + easy switch for customers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the difference between charges and expenses

A

Charges: Income to provider

Expense: Outgo for provider

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What to consider under charges and expenses when designing a contract

A
  • Reviewable charges? -> less marketable
  • Charges should match expenses in nature, amount and timing
  • Possible expenses:
  • Contract design
  • Marketing + sales
  • Initial commission
  • Renewal commission
  • Admin of setting up a new client
  • Underwriting costs
  • Ongoing admin of collecting premiums
  • Admin of paying benefits
  • Management of assets
  • Overheads
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What risks to consider when designing a contract

A
  • Credit risks
  • Market risks
  • Liquidity risks
  • Business risks
  • Operational risks
  • External risks

A product should cater for different risk appetites

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the main categories to consider when designing a contract?

A

Parties involved

Benefits

Commercial considerations

Financing

Practical considerations

Charges and expense

Risks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the main factors to consider when designing a contract?

AMPLE DIRECT FACTORS

A 
A - Administration system
M - Marketability
P - Profitability
L - Level and form of benefits
E - Early leaver benefits
D - Discretionary benefits
I - Interest/need of the customer
R - Risk appetite
E - Expenses vs charges
C - Competition
T - Terms and conditions
F - Financing (capital requirements)
A - Accounting implications
C - Consistency with other products
T - Timing of contributions or premiums
O - Options and guarantees
R - Regulatory requirements
S - Subsidies (cross)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the difference between price and cost?

A

Cost of benefits is the amount that should theoretically be charged for them

Modelled cost is the cost of the insurance allowing for the benefits and any other factors that affect the cost such as expenses and a contribution to profit

MODELLED COST = OFFICE PREMIUM

Price (actual premium) is the amount that can actually be charged given market conditions. it may be more or less than the cost

PRICE = RISK PREMIUM

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What can cause the price charged to be different from that of the modelling process?

A
  • Competition
  • Underwriting cycle
  • Loss leader
  • Margins
  • Cross-subsidies
  • Sales-channel
  • Business objective
  • Regulation
  • Special deals
  • Cartels
How well did you know this?
1
Not at all
2
3
4
5
Perfectly

2022: CP1 A311 Actuarial Risk Management (51 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions