Chapter 20 Product Design Flashcards
List 12 factors to be considered when assessing a product design
Financing requirements Onerousness of guarantees Risk characteristics Competitiveness Extent of cross subsidies Distribution channel Consistency with other products Regulation Admin systems Marketability Profitability Sensitivity of profit
State key consideration with regards to profitability
premiums charged sufficient to cover benefits, expenses and provide profit margin.
This will depend on the volume of sales achieved as well as the per policy premium/charging rates.
Protection: mortality basis should cover risk involved, risk will gradually change and future chance should be allowed for if appropriate
Savings: profit on investment income
Administration: expense loading cover marginal/admin costs incurred, allowing for cross subsidies
Areas of product design important for marketability
Innovative design (features make contract more attractive)
Attractive benefits (understandable to market and appreciated by them)
Attractive charging structure (for UL + consideration of guaranteed charges)
Guarantees and options (premium rates or structure)
Distribution channel
+impacts complexity of product which can be sold
+if using multiple channels, will same price be used?
The product design factors are not necessarily independent. Compromise will usually need to be struck.
Profitability
Financing requirement
Risk characteristics
Onerousness of guarantees
Sensitivity of profits
Marketability
Competitiveness
Extent of cross subsidies
Comment on the sensitivity of profit in product design
Mostly an issue for non-linked contracts, as under unit-linked, possible to have well-matched charging structure which reduces profit sensitivity to AvE
Impinge on profitability
+investment return
+mortality (or other contingencies, e.g. morbidity, longevity)
+expenses
+expense inflation
+persist-ency
Minimise sensitivity
+investment return (if there are no investment guarantees)
+mortality (make charge for this variable, at company’s discretion)
+expenses (make charge for this variable, at company’s discretion)
+withdrawal rates (don’t offer surrender/guaranteed values)
+matching (try to match income (charges) with outgo (expenses/benefit cost) as closely as possible by duration
Redesign non linked products
to reduce profit sensitivity
e.g. commission claw-back to reduce sensitivity to withdrawal
Comment on competitiveness in product design
The charging structure will be important for united-linked contracts as other characteristics influence risks that are borne by the policyholder
The level of expense charges, interest rate component and risk component will be important for non-linked contracts
The extent of competitiveness regarding with-profit contracts will depend on:
+Distribution of expense and mortality profit
+Market Maturity
+Market Investment characteristics
Comment on financing requirements in product design
Unless company has substantial capital resources, will want benefits/charges to be designed to minimise financing requirement.
UL advantages over non-linked contracts \+no/few expense guarantees \+no/few mortality guarantees \+no/few investment return guarantees \+smaller supervisory solvency margin requirement
Reduce strain on non-linked contract
+reduce initial acquisition costs (commission)
+reduce initial administration costs
+reduce valuation strain (increase val interest rate, reduce guarantees)
+financial reinsurance
Comment on risk characteristics in product design
Level of risk may be acceptable depends on insurer ability/willingness to absorb risk internally or re-insure
Death contingency
well studied and quantified risk, this easy to absorb risk, unless entering new market for that company
Large parameter risk
+unit-linked/review-able form contract ( to avoid long term rate guarantee)
+re-insure large part of risk
+incorporate very ample margin in premium rate
+offer is rider rather than standalone
Comment on onerousness of guarantees in product design
Problems
+suffer cost not fully expected
+reserve for loss possibility, increasing capital strain
Guaranteed surrender value
+generousness scale will be measure by reference to asset share
+onerousness can be quantified as their impact on product design on profitability under various scenarios
Investment return guarantee
for without profits non-linked business
Onerousness depends on
+size (how much guaranteed)
+period of time for which it holds
+significance of reserves (for the contract)
+volume of business to which it applies
+capital available to company ( to absorb initial reserving cost/eventual real cost)
Comment on extent of cross subsidies in product design
The company needs to consider the extent of sub-siding between small and large contracts. The marketing advantage of a simple premium and charging structure may conflict with avoiding cross-subsidies.
Comment on administration systems in product design
The issue of compatibility with the administration system can also be extended to cover the aspect of simplicity.
Comment on consistency with other products in product design
Company may wish to ensure charging/benefit structures of new policy are at least similar to any existing business.
Reduce system development (saves time)
Less training staff (administration, sales car, staff printing and marketing literature)
Unfair to existing policyholders (if new design appears more attractive, which leads dissatisfaction and possible marketing risk
Comment on regulatory requirements in product design
Company must adhere to any regulatory requirements which should be taken into account in product design, e.g. maximum charges, treating customers fairly
meet normal standards of professional ethical behaviour
Reccommended by professional guidance
regulatory requirement
Foster ongoing trust and good relations
