Additional 2

Question 1

Considerations when deciding on split between RB and TB for closed fund

Answer 1

1. should consider what the previous company’s philosophy
2. since PRE would have formed, a similar philosophy should be followed
3. since it is a closed book of business, changes could be warranted because you would need to distribute any surplus equitably over remaining policies
4. consider the term profile of the book of business - longer the average term to maturity, the more policyholders would require RB for peace of mind
5. consider the funding level of the portfolio - the higher the funding level, the higher the TB could be
6. equities have volatile returns, so company would want to keep guarantees low to protect solvency, hence prefer RB to TB
7. RBs increase guarantees so increase risk of insolvency
8. TBs can be varied up or down so can absorb capital losses
9. will also depend on volume of business remaining in closed book
10. will depend on assets invested in and if company intends to change the split of assets
11. low free assets increase risk, so TB preferred
12. reserves for RB would need bigger margins if backed by equities, which would reduce free capital further
13. TBs defer surplus distribution, decrease guarantees and increase free assets
14. split should reflect marketing literature
15. will not wish to deviate too far from competitor’s practice
16. shareholders would prefer RB due to earlier payments to them

Question 2

Why company may hold equity in excess of the minimum solvency margin

Answer 2

1. maintain a probability of ruin that is acceptable to the company’s shareholders
2. maintain an acceptable solvency ratio relative to the other insurers in the market
3. maintain a pre-determined credit rating
4. fund new business plans
5. fund large expenditures expected in the future
6. allow more investment freedom
7. reinsure less
8. allow management more freedom to pursue profitable projects
9. maintain funds for potential opportunities

Question 3

Why is it not always possible for pure matching?

Answer 3

• liabilities are not always known with certainty e.g. may be linked to mortality, may not be any assets linked to mortality
• if assets are chosen to match the longest of the liability payments, the earlier income from the assets will exceed the short-term liability outgo. This exposes the company to reinvestment risk
• assets with a long enough term might not be available
• assets that fully match increasing benefits might not be available
• there is also uncertainty around future cash inflows and on what future terms they can be invested.

Question 4

Asset enhancing financial reinsurance

Answer 4

• allows you to unlock a proportion of the value of profitable in force business
• VIF is the excess of the statutory reserves over the realistic reserves
• VIF will be released over time, but is currently an off-balance sheet, non-tangible item
• in exchange for entering into a reinsurance contract on existing business, typically an original terms QS, the reinsurer gives the insurer cash now
• this is paid back over the next few years from the future emergence of the VIF as future profits

Question 5

Reduce new business strain on contract that doesn’t have unit-related FMC

Answer 5

Negative non-unit reserve
- for policies where future charges exceed the non-unit related liabilities, negative non-unit reserve can be held
- will reduce the overall reserve required to be held by taking advanced credit for future positive cashflows
- loan from the contracts with positive non-unit reserves
- repaid as profit emerges

Question 6

Constraints of negative non-unit reserves

Answer 6

• needs to be allowed by local legislation
• sum of unit and non-unit reserve for a policy should not be less than any guaranteed surrender value
• there should be adequate non-unit surrender penalties to ensure that the value of the future cashflows is not lost on surrender
• the future profits arising on the policy with the negative non-unit reserve should arise in time to repay the loan
• after taking account of the future non-unit reserves, there should be no future negative cashflows for the policy
• the sum of all unit and non-unit related reserves should not be negative
• the negative non-unit reserves should be determined prudently

Question 7

Market-consistent approach to determining policyholder provisions

Answer 7

June 2106, Q6 i

Question 8

Diversification benefits when calculating minimum solvency requirement

Answer 8

• the aggregated solvency margin should be reduced to allow for diversification benefits that exist between individual risks
• this is because it is unlikely that investment and mortality shocks will happen at the same time
• diversification benefits can be allowed for through the use of a correlation matrix
• this could be allowed for using copulas
• the solvency margin calculated using correlation matrices may be too low due to the non-linearity and non-separability of individual risks
• the linearity property of correlation matrices requires that the solvency margin required is a linear function of the risk drivers, but this is not always the case
• risk drivers may interact with each other and certain scenarios coincide, albeit with very small probability

Question 9

Describe the cashflow model that could be used to determine the value of the expected future profit from the in-force UWP business

Answer 9

June 2017 Q2 iii

Question 10

Describe LTC insurance

Answer 10

• LTC insurance provides for the cost of long term care
• which involves all forms of continuing personal or nursing care and associated domestic services
• intended for people who are unable to look after themselves without some degree of support
• it may be provided in the insured’s own home, at a day centre, or at a state-sponsored care-home setting
• can be funded by the state, private funding by individuals or charities
• can be provided on an indemnity basis or non-indemnity basis

Question 11

Negative implications of increasing medical limits

Answer 11

• increased anti-selection (especially if competitor limits are lower)
• more reliance on disclosures - more repudiation of claims
• more volatile morbidity experience
• underwriting systems and manuals need to be updated
• underwriting staff needs to be trained
• brokers may take advantage
• cost of obtaining reinsurance may increase

Question 12

Basic equity principle in the pricing of a unit-linked fund

Answer 12

• the interests of unitholders not involved in a unit transaction should be unaffected by the transaction
• the unit holders should only be interested in the price at which they bought units in the fund and the price at which they redeem them
• in theory, the movement in price between the two events should only reflect the performance of the underlying assets and charges deductible under the policy terms
• therefore the price of units should be unaffected by creation or cancellation of other units

Question 13

Data checks

Answer 13

1. check data for accuracy and completeness
2. perform reconciliation checks by reconciling previous valuation data with current valuation data and policy movements
3. reconciliation can be done for number of policies, premiums and sum assured
4. policy movements can be reconciled against accounts
5. consistency checks with data from previous valuation e.g. average sum assured, ratio of premium to sum assured
6. check for unusual values e.g. zero premium
7. spot check for inaccurate data

Question 14

Checks on results

Answer 14

1. reconcile results with those of the last supervisory valuation
2. perform simple ratio checks on results e.g. increase in reserves as a proportion of premiums
3. construct a very simple back of the envelope model using a few model points to represent the whole portfolio. check the full model’s output against this for order of magnitude errors
4. perform sensitivity tests on key parameters
5. AOS
6. analysis of EV to explain reason for change in results

Question 15

Use of EV in executive remuneration schemes

Answer 15

Nov 2015 Q6 ii

Question 16

Reasons for performing an analysis of EV

Answer 16

1. reconciling to previous year EV
2. management information
3. information for published accounts
4. validate calculations, assumptions and data used in the EV calculation
5. show the financial effect of deviation between best estimate assumptions and actual experience
6. show the financial impact of new business
7. be consistent with reporting performed by competitors

Question 17

Outline briefly the advantages and disadvantages for the policyholder and the company of
distributing bonuses in this form, as opposed to the use of a reversionary and terminal bonus
structure

Answer 17

Nov 2015 Q7 iii

Question 18

Different expense investigations that could be done

Answer 18

• investigate whether any mistakes were made in the initial analysis and determine the actual expenses per policy
• check for one-off items
• check whether the deviation is significant in terms of absolute size
• check whether higher expenses per policy is due to expenses exceeding the expected level or due to lower than expected business volumes

Question 19

Reasons for imposing exclusions

Answer 19

• reduce costs (deferred periods - short claims excluded)
• to manage anti-selection risks
• to simplify and reduce underwriting
• to reduce moral hazard
• some risks are difficult to price due to considerable uncertainties e.g. war
• some risks are difficult to price due to lack of data e.g. skin cancer
• may be poor practice to provide a benefit e.g. illegal activities
• payment may have been received elsehwere

Question 20

Reasons for imposing exclusions

Answer 20

• reduce costs (deferred periods - short claims excluded)
• to manage anti-selection risks
• to simplify and reduce underwriting
• to reduce moral hazard
• some risks are difficult to price due to uncertainties e.g. war
• some risk are difficult to price due to lack of data e.g. skin cancer
• may be poor practice to provide a benefit e.g. illegal activities
• payment may have been received elsewhere

Question 21

Benefits of reinsurance

Answer 21

1. protect against large single claim
2. protect against aggregation of claims
3. protect against poor experience in general through stop loss
4. reduce new business strain through financial reinsurance
5. demonstrate financial strength to investors
6. reducing capital requirements by making use of reinsurer’s capital
7. reduce claim payout fluctuations
8. technical assistance
9. reduce parameter risk
10. allows the insurer to separate out different risks from a product allowing the insurer to optimise its risk management and capital requirements
11. a financing arrangement with a reinsurer to help improve the insurer’s solvency position

Question 22

Describe the stochastic modelling exercise that should be carried out to determine the appropriateness of its investment strategy

Answer 22

June 2022 Q4 ii

Question 23

Factors that should be considered when distributing surplus

Answer 23

• the surplus should be calculated separately for homogeneous groups
• the amount of surplus to distribute in any given year depending on what is specified in the contract
• the insurer should ensure that the majority of the retained surplus is distributed over the lifetime of the annuitant
• PRE
• whether the surplus arising is non-recurring and how to distribute that
• what competitors are doing

Question 24

Advantages and disadvantages of obligatory/obligatory reinsurance

Answer 24

Advantages
- the insurer has guaranteed cover for each risk placed
- the insurer knows up front what maximum risk it can accept
- the insurer is likely to get better service and pricing

Disadvantages
- the insurer has to cede a certain amount to the reinsurer
- this may mean giving away more profit than it would like to
- more likely that the treaty reinsurer will have some say in the underwriting and claims management process

Question 25

Explain how the equating policy value method can be used to calculate the revised premium rate for an increased sum assured on these contracts

Answer 25

Nov 2021 Q5i

Question 26

Minimise anti-selection risk on option

Answer 26

1. maximum sum assured
2. maximum policy term
3. restrict when option can be exercised
   - life event
   - certain dates
   - maximum age at which it can be exercised
4. financial underwriting
5. prudent pricing
6. option only applicable to those who are accepted on standard terms

Question 27

Methods for determining investment guarantee charges

Answer 27

June 2021 Q3 iii

Question 28

Describe the model that you would use for this process (determining capital efficiency), detailing the cashflow items that would
be included.

Answer 28

June 2021 Q7 ii

Question 29

Market-consistent assumptions

Answer 29

Mortality: determined from reinsurance risk premium rates
Expenses: determined from expense agreements available in the market e.g. third party administration companies
Inflation: difference in yields between inflation linked and fixed interest government bonds

• As it may not be practical to find market-consistent expense and demographic assumptions, the cashflow projections would therefore be made on a best estimate basis plus a risk margin to allow for the uncertainty in the payments
• this might be done by applying a margin to each assumption, or using the cost of capital approach

Question 30

considerations you would need to take into account when setting the benefit definitions for new income protection product

Answer 30

1. are the benefits attractive to the target market
2. the definition of disability would need to be appropriate
3. the benefit should take into consideration pre-disability income
4. the replacement ratio should be such that it does not discourage a return to work
5. an appropriate escalation rate should be considered
6. the duration of the benefit would need to be considered. the benefits would nead to cease on recovery, death, retirement age
7. the timing of the benefit payments (e.g. monthly)
8. the appropriateness of deferred periods
9. whether a proportion of the benefit will be offered on partial return to work
10. whether there are any regulatory requirements or restrictions

Question 31

Risks faced by company

Answer 31

WORRDS MMCCB FIE

Dec 2020 Q7 i
1. market risk
2. credit risk
3. operational risk
4. strategic risk
5. mortality and morbidity risk
6. business volumes and mix
7. reinsurance
8. reputational risk
9. competition risk
10. data risk
11. withdrawal risk
12. fraud
13. investment return
14. expenses

Question 32

Describe how a model may be used to determine the suitability of the proposed changes to the investment strategy

Answer 32

Dec 2020 Q8 ii

Question 33

The new marketing manager has suggested that in order to make the product more attractive and
improve sales she would like to add an option that can be exercised by deferred annuitants at age 65 to
allow them to convert future income into an immediate lump sum at the guaranteed conversion rate of
R10 per R1 p.a. of annuity income given up. Explain how the insurer could determine the cost of offering this option

Answer 33

June 2020 Q1 ii

Question 34

Needs met by CI

Answer 34

• Income can be provided from the lump sum via an annuity when the individual cannot work as a result of his critical illness
• The benefit can be designed to repay a mortgage or other loan while the policyholder’s health is in question following a diagnosis of a critical illness
• Medical costs can be funded when the critical illness requires surgery or another expensive treatment
• A change of lifestyle can be funded where necessary to improve the claimant’s health, for example, moving to a less stressful job after a heart attack
• The benefit can be used to improve quality of life following the diagnosis e.g. holiday
• The benefit can be used against future un-insurability after a CI event
• Other needs include recuperation after illness, taxation planning

Question 35

Outline 4 reasons why a company might want to defer profit distribution under its with profit products

Answer 35

June 2020 Q4 i

Question 36

Factors determining bonus rates

Answer 36

June 2020 Q4 ii

Question 37

8 ways in which the insurer can use the results of a persistency analysis

Answer 37

1. updating the pricing basis
2. updating the reserving basis
3. calculate the asset share for the remaining policies
4. model office work e.g. monitoring profitability, EVs
5. revising the underwriting process
6. revising product design e.g. setting discontinuance terms
7. changing marketing message/distribution channel/target market
8. revising the mechanics of any commission payments and clawbacks

Question 38

Other risks for the product (investment risk)

Answer 38

• assets that match the liabilities might not be available, particularly if the DMT is long
• assets that match the benefit increase structure of the product may not be available
• if following an unmatched strategy, the insurer is exposed to
• reinvestment risk
• risk that investment returns are lower than anticipated
• movements in assets that may create solvency difficulties

Question 39

Risks on annuity business

Answer 39

• mortality
• investment return
• expenses
• business volumes
• business volumes on similar products
• reinsurance
• reputation
• regulation
• fraud
• competitive pressures

Question 40

How to determine supervisory reserve for investment guarantees on unit-linked products

Answer 40

Nov 2019 Q3 ii

Question 41

Policy risk question

Answer 41

June 2015 Q4 ii