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0

Main consumer interests?

CANES

Choice
Affordability
Needs met
Extent of guarantees/review ability
Simplicity and clarity

1

Design factors

FORCES CRAMP CURD

Fin or cap req
Options and gtees
Risk control or characteristics
Culture
Ext XS
Sensitivity of profit

Consistency with other products
Regs
Admin systems
Marketability and selling
Profit

Competition/competitive
Underwriting
Reinsurance
Distribution channels

2

Restrictions regulator can place on insurer

CITRUS V

Contract type
Investments
T and c
Rating factors (1 price, gender neutral)
Uw
Sales channels
Volume by res req

3

Distribution channels

Insurance intermediary
Tied agent
Own sales force
Direct marketing (mailshot, telesales, Internet, advertising)
Worksite marketing

4

Reasons for tech res

MIAnAmAR

M and A
Inv strat
Liabs in IMPS accounts
Reinsurance

5

Principles of investment?

1) invest in A appropriate to NTC L
2) invest in A to max overall return (income and capital)
3) extent to which 1 can be departed to meet 2 depends on extent of company free assets and risk appetite

6

Reasons to reinsure?

Improve this Valuable SAD LIFE NIFE RST

Improve solvency position
Good value for money
Improve credit rating

Smooth results
Avoid single large losses (large depends on FA)
Diversify risk

Limit exposure to risk
Increase capacity to accept risk (NB, new territory, unusual)
Financial assistance (NB finance, free assets, m and a)
Expertise (pricing, design, uw, cm)

RST arb

7

Types of reinsurance

FinRe
Prop - share risk (qs, surp) share prem (original terms, risk prem re)
Non prop (risk, agg(sl), cat)

8

Reasons to analyse surplus?

Independent check on valuation process and data
One off components of surplus identified
Financial impact of NB
Financial significance of valuation ass not equal to experience (release of margins?)
Trends in experience identified

9

Reasons to do an AOEV

Big MF R MIA

Bonuses for exec remun
M and A
Management info
Accounts public
CAD, validate calcs assumptions and data used
Reconcile year on year

10

Risk management techniques

I STOPPED RESK

Initial uw (gatekeeper and risk analysis)

Surveys on customer satis, retentions team
TCF
Outsource SLA
Product design
Process controls for ditribution
Experience monitor
Data checks

Reins
Enterprise risk man
Staff quality and competence assessment
Claims man

11

Sources of risk

RISKS I PONDER PANICS CARER

Commission clawback - appropriate commission
Rates (morb mort) (claim amount rates data) - reinsure, cm
Investment -
---liquidity -- cashflow monitoring
---inv perf -- clear inv strat - safe assets e.g, AAA
---mismatch -- mismatch res - match NTC L
Selection - good uw
Comp - keep abreast of market dev

Inflation

Persistency - retentions, customer survey
Options and gtees - reg monitoring, reduce fixed options and gtees so more reviewable
NB vol, mix SSTN - research possible vol, mix, good uw
Data (policy and other) - check pol, claims data
Expenses and inflation - monitor experience vs pricing basis
Reins - diversify

Physical e.g. It recovery, good systems
Actions of management - senior management aware of risk policies, ERM
Non disc - good uw, train sales staff, internal
Internal audit (internal external review of fin results) systems failure (clear controls and governance) fraud (internal external audit)
Counterparties (distributors, hospitals, investments)
State benefits

Cat
Agg - diversify e.g, by region and concentration - multiple 3rd parties e,g, reinsurance
Reg, leg, tax developments - keep abreast of reg dev
Early screening and diagnosis - keep abreast of medical dev
Reputational ( appropriate commission) risk, customer service shortcoming - surveys, clear policy wording, TCF

12

Counterparty and distribution risk management

SSCC M DMT

Secure counterparties
SLA

Contract wording clear
Credit insurance and derivatives

Monitor performance

Due diligence
Multiple counterparties to limit exposure
Train staff

14

Explain EV calculation in 10 points

1. PV of future sh profits from EB plus sh owned share of net assets
2. NA are excess A over those required to meet L
3. NA values are at MV or discounted to reflect lock in e.g, SCR
4. PV future sh profit on conventional without profit is Prem + inv inc + res release - exp - claims - tax
5. For UL it's future charges + investment ret on non unit fund + release of non unit res - expenses - benefits in excess of unit res
6. Full data or mp used
7. Assump depends in purpose, prob BE
8. Tax accounted for
9. Reserves in both parts must be consistent
10. Sale value is BE, buy value is prudent, appraisal value includes goodwill (value of expected NB)

15

Formula vs Cashflow

Formula:

1. Short term
2. Simple application
3. Quicker to run
4. Easier to check/audit/understand

Cashflow:

1. Longer term
2. Multistate possible
3. Stochastic modelling possible e.g. Guarantee costs
4. To overcome Formula Problems

Formula Problems:

1. Cashflow timing not accurate
2. Assumptions/returns varying over time not possible
3. Negative net cashflows not possible
4. Accumulation of reservers not possible

16

What do we want data to be ideally? (credible..etc)

Relevant
Detailed
Recent
Credible
Available
Reliable
Volumous
Affordable
In good format

17

Sources of data for pricing?

Own data
Population
Reinsurers
Consultants
Market (insured lives, supervisory returns)
Trade magazines
National statistics
Overseas
Modelling software companies

18

What might not be reflected in data other than own data?

uw
cm
t's and c's
Distn channels
Target market

19

What is the equation of value (formula) for the premium

=(Claims+expenses+commission+tax + etc. - Investment income)/Value of one unit of premium
=(outgo-income)/P

20

What would you also include in the formula? How is 50% of annual premium included for profit

Profit margin, subtract 0.5 from denominator if annual

21

What happens to all the formula values when modelling?

They are projected then discounted

22

What are typical cashflows (think about formula too)

Outgo:
Expenses (init/ren/claim) + commission + tax + claims + contribution to reserves + contribution to SCR

Income:
Premiums plus investment return on cashflows and reserves

23

What stages are involved in multi-state modelling?

Stages of healthy/claiming:

Healthy premium paying (pp)
Sick and within deferred period (not pp)
Claiming following deferred period (not pp)
Recovering back to premium paying (pp)
Dying (not pp)

24

When in a stage of multi-state modelling, what rates will be different? e.g. lapse

Lapse
Mortality
Sickness inception
Recovery

25

How is multi-state modelling used in practice?

1. Determine proportions of lives in each stage
2. Model benefit outgo as number in non-pp stage * avg sa
3. Model premiums plus investment income as the premium paying stage
4. In reality there is not enough data and computing power to split into all the subgroups, so groups are combined

26

What are the 3 types of option?

1. GIO - Purchase additional cover, usually at a life event, without further health evidence, at current standard rates for that age
2. Continuation - Renew long term insurance at end of original term, without further health evidence
3. Reinstate mortality cover after accelerated illness plan is triggered through illness

27

Events that mean a GIO can be used?

Buy house
Marriage
Civil partnership
Birth of baby
Adoption
Salary increase
Every 3rd policy anniversary
Exercise before age 55
Plan started before age 45
Issued on standard rates

28

Limits to extra amount a GIO can purchase of SA?

A strict maximum
A % of SA
A % of the percentage increase in salary
Maximum of the salary/loan increase

29

What extra things do you need to price in mortality/morbidity options?

1. Needs 2 extra assumptions as part of pricing basis
a. Probability option is exercised
b. Expected mortality/morbidity of lives who choose to exercise option

30

Explain north american method of pricing an option?

1. Needs 2 additional items in pricing basis
a. Double.triple decrement table for lives who haven't yet exercised option, for death/disability/take up decrements
b. Mortality/morbidity tables for lives who have exercised the option, represented by rates q'x
2. EPV benefits - EPV premiums is the EPV cost of option

31

What are the disadvantages of the north american option technique? and the conventional method?

NA.
Difficult to get enough data for the decrement rates
NB has no direct experience

Conv.
1. Can't use when many possible exercise dates
2. Or when there is a choice of which option to take
a. For 2. the approach would be to assume the worst option financial for company is taken up

32

Explain the conventional method

We make the following assumptions:
1. All lives that can take up the option will do
2. The mortality/morb experience of those lives who take it up is the ultimate rates (worse) corresponding to the select rates (good mort) if underwriting had been completed as normal at exercise date
3. The mortality/morbidity basis does not change over time so only 2 sets of tables are needed

33

What is the other way of valuing an option?

Stochastic modelling

34

Apart from data and costing options/guarantees in pricing what else will you need to think about?

Anti-selection
Regular monitoring:

Regularly monitor NB basis
Regularly monitor reviewable premiums
Regularly review reserves

Premiums and profits:

Premium competitive vs. market
Premium right for enough volume
Are profit margins right or do they need reducing for market share
Is the Overall return on capital right?

Regulations and reinsurance:

Regulatory restrictions on pricing e.g. prescribed basis
Regulatory restriction on investments e.g. local assets must be invested in
Reinsurance impact on pricing/development/profit
Reinsurer's requirements


35

How can reinsurance help in pricing?

SADLIFENIFERST

36

What are the 3 important things in state healthcare provision?

Objectives
Methods
Funding

37

What are the 4 main objectives of providing state healthcare?

Protect nation's health
- healthy nation means more productive and higher GDP
Subsidise the poor
- Allow access to doctors/medicine/hospitals
Balance the budget
- funded through general tax or specific health charges
Follow social culture and/or political promises
- State healthcare may be part of nations culture and difficult to change in short term

38

4 possible ways state healthcare and insurance can co-exist

Insurance as an optional/compulsory alternative
Insurance as an optional/compulsory compliment
Alternative means comprehensive state healthcare, but you might want better service, or not be allowed if salary above £x
Complement means limited state healthcare and individual can/must fund rest.

39

What are the methods the state will use to provide healthcare?

1. Provide own hospitals etc.
2. Use commercial hospitals and reimburse partly/fully
3. Cash lump sum for old-age people to change home etc.
4. Income for those out of work/old

40

How will state benefits be related to earnings? Why would they be each type?

1. Salary-related, reward for higher tax payers
2. Flat-rated to provide incentive to return to work, minimise cost, encourage self-provision to those who can afford it.

41

What are the incentives a government can offer to those doing self-provision for healthcare?

1. tax relief on premiums
2. Exclude some/all of population from some national welfare
3. reduce general tax
4. direct subsidy to providers to reduce prices

42

How can the state fund healthcare?

PAYG
Estimate outgo, tax revenue and subsidy needed over next year and adjust tax
Forward funding
Establish all of this over next 5, 20 year etc.
Create a fund just for healthcare
Intermediate methods
A mixture of immediate and modelled, used when reducing workforce vs. beneficiaries.

43

Regulatory restrictions for pricing

1. Prescribed basis
2. Must send in basis
3. Invest in 'local' assets
4. Collect premium tax

44

Reg restrictions for design and stakeholders

Regulator desires:
1. Insurer remains solvent
2. Customer detriment minimal (sales/admin/cm)
3. Insurer files accurate reports

To minimise customer detriment:
1. Clear unambiguous wording
2. Prescribed basis
3. Send in calcs before marketing
4. Represent value for money
5. No undue pressure e.g. have cooling-off periods
6. Product sold to customers it's designed for

45

Regulatory restrictions on investments

1. type
2. maximum amount used for solvency
3. proportion held in particular type
4. single counterparty/country exposure limit
5. custodianship fo assets
6. currency matching
7. extent of mismatching allowed
8. mismatch reserve

46

Regulations in risk management

TCF
impacts on..
1. Sales process through literature
2. claims process
3. customer relationship management

Company must:

1. avoid promising more than scope of product
2. make all policy condition clear and unambiguous
3. monitor sales process

47

how are Regulatory developments a source of risk

Changes may effect EB
e.g. not using gender, not allowed exclusions
Court cases may set a precedent for compensation

48

Regulatory restrictions in the general business environment?

1, type of contract
2. premium rates/charges
3. ratings factors
4. t's and c's like clear method of pup value calc
5. sales channels/commission/procedures
6. u/w restrictions like gender
7. reserve requirements being an indirect limiter to NB volume
8. Investment retrictions

49

What are the 4 things to write down for each distribution channel?

1. Who they work for
2. How remunerated
3. Complexity of product
4. Initiator

50

Describe the distribution channels

Insurance intermediary
1. Who they work for - fully independent of market (though may be owned by an insurer), sell products from whole range
2. How remunerated - commission from insurer or fee from policyholder
3. Complexity of product - professional, most complex
4. Initiator - customer is, though periodic reviews mean more sales

Tied agent
1. Who they work for - other financial institution like bank, selling limited range, tied to one or several insurers
2. How remunerated - commission from insurer
3. Complexity of product - simpler
4. Initiator - typically customer but agent may be active in selling too

Own sales force
1. Who they work for - insurer directly
2. How remunerated - commission/salary/mix
3. Complexity of product - not very complex
4. Initiator - the agent, through sales/client lists, hope to build rapport

Direct marketing
1. Who they work for - mailshot/press/telesales/internet/social media
2. How remunerated - n/a
3. Complexity of product - very simple
4. Initiator - press or tele = mixture - mailshots = insurer

Worksite marketing
1. Who they work for - representative of insurer obtains permission from emplyer to address/sell to group of employees
2. How remunerated - commission/salary
3. Complexity of product - simple, though depends on sophistication of audience
4. Initiator - agent
Currently used in PMI, could be for CI/IP, not for LTCI

51

Types of commission?

Indemnity - for premiums not yet paid
Renewal - encourage persistency
Initial (between indemnity and level)
Level (a percentage of each premium paid)
% of SA

52

Types of tax, what do they influence/constrain

1. On premiums
2. On annual profits (change in A - change in L)
3. Investment income gains/loss - some/all operating expenses

They influence design (tax efficiency) but also constrain it

53

Give 9 ways that the general business/economic environment can affect sales/design etc. Give line on each

1. Regulatory regime restrictions (CITRUSV, can non-insurers sell, what are their restrictions like?)
2. Tax regime (which products are tax efficient)
3. Commission (distributors want to sell high commission)
4. Changes in need to buy/sell (different governments rules)
5. Professional guidance (guidance on government regs)
6. Inflation (reviewable/expenses)
7. Business cycle (employer demand vs employee demand)
8. Employment security (IP)
9. Political stability (which government likes NHS?)

54

What 4 things ensure accurate and complete policy/claims data?

Accurate recording
Regular vetting and Spot checks
Data acceptance controls
Compulsory fields
Staff training

55

Give 2 points on accurately recording data?

1. Part of the internal/external audit team will be to consider if data is reliable
2. Format of proposal form and admin system input screen the same

56

Give 2 points on regular vetting and spot checking data?

1. Records should be check end to end through different systems
2. Should periodically compare paper records vs. facts stored.

57

Give 2 points on data acceptance controls?

1. Software should have automatic error checking and prevention of input e.g. if age > 120
2. Where exceptions occur, only staff of certain level can change it, and an audit trail must be kept

58

Give 2 points on compulsory fields in data checking

Input not accepted unless these are filled
e.g. Age, sex, policy number to cross check against claim

59

Give 2 points on staff training for data checking

1. Close relationships with input staff and software staff should be built
2. Encourage input staff feedback

60

8 principles of assumptions?

RAF FsCUNT

Relevant - the data should be relevant to risks
Accurate - parameters derived as accurately as possible
Flexible - flexible basis for valn/reserving to reflect changes in risk

Financially significant - take particular care over FS assumps
Consistency between various assumps..(client)
Needs of client, considered
Tax/regs/legs accounted for

61

What assumptions might I forget?

Benefit outgo and inflation
Transfer and recovery rates
SCR
Market consistency
Risk discount rate
Profit criterion
Margins

62

Where will you need to monitor experience? Or what will you do with the results?

Before sale:

Design
Sales literature
Commission
T's and C's
Marketing
Pricing

During sale:

Underwriting
Data and admin systems

During policy in force:

Reserving
Capital allocation
Staff headcount
Staff training

During claim:

Claims management