Chapter 20: Product design

Question 1

Product design factors: (12)

Answer 1

1. Meeting customers’ needs

F - Financing requirements
O - Onerousness of guarantees
R - Risk characteristics
C - Competition
E - Extent of cross-subsidies
D - Distribution channel

C - Consistency with other products
R - Regulation
A - Administration systems
M - Marketability
P - Profitability
S - Sensitivity of profit

Question 2

Profitability (2)

Answer 2

• A company will want to ensure that the premiums charged for non-linked contracts will be sufficient to cover benefits to be provided and the expenses in most foreseeable circumstances, and provide a profit margin.
• For unit-linked contracts it will want to ensure that overall charges will be sufficient to cover expenses to be incurred, and provide a profit margin.

Question 3

Marketability (4)

Answer 3

• The benefits offered need to be attractive to the market in which the contract will be sold.
• Innovative design features may make a contract more attractive as may the addition of options and guarantees.
• The charging structure under a unit-linked contract needs to be attractive to the potential market and consideration needs to be given to whether the charges should be guaranteed.
• More generally, it needs to be considered what guarantees should be given with regard to premium rates.

Question 4

Competitiveness (2)

Answer 4

• A company will not want the structure and level of the charges under a unit-linked contract to depart too far from those of competitors, but this depends on how it will market the contract.
• The same applies to the premiums under without-profits non-linked contracts.

Question 5

Financing requirement (2)

Answer 5

• Unless the company has substantial capital resources it will want the benefits and charges to be designed so as to minimize its financing requirements.
• There is more scope under unit-linked products to adjust the design to achieve this than under non-linked products.

Question 6

Risk characteristics (2)

Answer 6

• Consideration will need to be given to the acceptability of the level of risk associated with a proposed design.
• The level of risk that may be acceptable will depend upon the company’s ability or willingness either to absorb risk internally or to re-insure it.

Question 7

Onerousness of any guarantees

Answer 7

The company will need to consider the onerousness of any guarantees, for example the level of any guaranteed surrender values under a non-linked contract

Question 8

Sensitivity of profit

Answer 8

Under a unit-linked contract, it may be possible to have a well-matched charging structure that reduces the sensitivity of the contract’s profitability to variations in future experience.

Question 9

Extent of cross-subsidies (2)

Answer 9

• 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.

Question 10

Administration systems

Answer 10

The system requirements of a new product may limit either the benefits to be provided or the charging structure to be adopted.

Question 11

Consistency with other products

Answer 11

The company may wish to ensure that the charging and benefit structures of a new policy are at least similar to any existing business

Question 12

Regulatory requirements

Answer 12

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