Chapter 34 - Further Risk management

Question 1

In which ways might a company try to keep its ‘current cost base’ within its policy loadings

Answer 1

SOCIAL E

• attempt to SELL greater volumes of (profitable) business, without increasing the cost base by a great proportion
• ensure that staff are not OVERQUALIFIED (and overpaid) for the work they are required to do
• ensure that COST-OF-LIVING and grade salary rises are not excessive, but consistent with the price needed to retain the necessary quality of staff
• IMPOSE budgetary constraints or targets within which individual departments are required to manage
• maintain ACTIVE control of staffing levels, to reflect the volume of business ( and the amount of work) being achieved.
• increase the LOADINGS in the premium so that higher expenses can be recovered (but this is only possible if the competitive position will permit it)
• improve EFFICIENCY wherever possible. E.g. increase automation and/or computerisation of tasks, so requiring a smaller workforce, streamline underwriting procedures, use cheaper distribution channels…

Question 2

Commissions should be controlled by a regular monitoring procedure at the level of

Answer 2

• Product line
• Distribution channel
• Specific sales person or broker concerned

Question 3

What are the ways in which commission systems can be designed to encourage better persistency

Answer 3

• Pay lower initial commission and higher renewal commission. This will give the brokers more incentive to take an active interest in their existing clients and hence reduce the proportion who withdraw early
• Use a commission clawback system - whereby a proportion of the initial commission paid has to be returned to the insurance company if the policy is discontinued within a set period (eg three years), the proportion repaid reducing the longer the policy is maintained

Question 4

What is necessary to monitor with regard to new business sales for each product line and sales channel

Answer 4

• Frequency of premium
• Policy charges/loadings
• Actual expenses incurred
• New business valuation strain

Question 5

To reduce the mismatch between actual expenses and policy charges/loadings, and to have lower new business strain, the insurer could:

Answer 5

• Restrict or encourage certain product lines and/or distribution channels
  – directly by structural change
  – indirectly by remuneration arrangements
• Reprice and/or redesign contracts, including the possibility of an increased minimum premium

Question 6

What are the two main types of options given under life insurance policies
and give examples

Answer 6

• Financial options - eg. guaranteed annuity option, where a policyholder has an advance guarantee of converting a lump sum into an annuity income at a minimum conversion rate
• Mortality options - eg. Policy gives right to purchase a further policy at a future data, on then standard rates of premium and without needing to present further evidence of health at that time