Ch 23: Contract design Flashcards
List 18 factors to consider when designing or redesigning a contract
AMPLE DIRECT FACTORS
Administration systems Marketability Profitability Level and form of benefits Early leavers benefits
Discretionary benefits Interests and needs of customers Risk appetite of the parties involved Expenses vs charges Competition Terms and conditions of the contract
Financing (capital requirements) Accounting implications Consistency with other products Timing of contributions or premiums Options and guarantees Regulatory requirements Subsidies (cross-)
List the 7 key parties involved in contract design
ALPACAS
Actuaries Lawyers Providers of benefits Accountants Customers Administrators Shareholders / financial backers
List the factors influencing the needs of the provider
- The chosen market
- The capital available
- The expertise available
List the factors influencing the needs of the customer
- The capacity to pay
- The risks they need to be covered
- The benefits that are needed at different times in the future
- Attitude to financial risk
Give examples of how a contract can be designed to cater for different risk appetites amongst customers
- Different investment funds , e.g. low, medium and high risk
- Different levels of cover, e.g. comprehensive vs third party
Give examples of how the regulatory environment may influence the design of a product
Products must meet legal or regulatory requirements, if any.
Products can be designed to benefit from favorable financial or taxation regimes.
Products should be designed to ensure that initial expense can be recouped if a policy is cancelled within any regulatory ‘cooling-off’ period.
Regulation may require information to be disclosed to potential customers, for example discontinuance terms.
Give examples of contract design features that make a contract more marketable
- Guarantees, options and choices
- A competitive (low) price
- Transparency and simple to understand
- Features that distinguish it from the competitors
Give examples of options relating to: premiums, benefits, the use of contract proceeds and any other options that might be offered as part of a contract design
- Premium options:
- waiver of premium
- option to increase / decrease premium
- option to choose / change premium frequency - Benefit options:
- discontinuance
- early or late or ill-health retirement
- spouse’s benefits
- rider benefits
- option to protect a no-claims discount - Use of the contract proceeds:
- choice of annuity provider
- choice of hospital under health insurance - Other options:
- option to renew / convert a term assurance without further underwriting
List examples of guarantees that might be offered as part of a contract design
- Guaranteed benefits
- Guaranteed minimum maturity value
- Guaranteed minimum growth rate
- Guaranteed annuity rates
- Guaranteed premiums
- Guaranteed charges
What is the underlying principle to consider in setting discontinuance terms for an insurance company or benefit scheme?
FAIRNESS between:
- the policyholder or member who is leaving
- the remaining policyholders or members
- the provider of the benefits
Surrender
The policy stops, there is no further cover and the policyholder receives a lump sum payment (the surrender value)
Lapse
The policy stops, there is no further cover and usually no payment is made to the policyholder by the insurance company
Paid-up
The policyholder ceases to pay premiums but the policy continues to offer the policyholder some cover.
In this case the benefit is reduced to reflect that there are no more premiums and is called the paid-up value.
Withdrawal
This normally encompasses surrender and lapse, as the policy does not stay in force.
How does an insurance company decide on which contracts to offer discontinuance terms?
It will look at:
- market practice
- regulatory requirements
- anti-selection risk
- the difficulty and cost of assessing and implementing suitable terms
The insurer may also consider past practice.