Chapter 34 Flashcards
(16 cards)
What can insurers do to ensure that expenses and commission are kept within the loadings received for them?
MMOSAIC
- M - Monitoring the actual levels of expenses closely (initial, renewal, termination, investment)
- M - Monitoring procedures to pick up and prevent any upward slippage in commission levels
- O - Operation efficiency improvements (e.g. through automation)
- S - Staffing and salary level controls - consistent with the work required for NB/sales effort
- A - Attempting to sell more business without increasing the overhead cost base
- I - Increasing premium loadings and/or charging rates provided they are still competitive
- C - Competitors’ ratios of actual expenses over premium received monitored to ensure that expenses are at a competitive level
Commissions should be controlled by a regular monitoring procedure at the level of:
* Product line
* Distribution channel
* Specific salesperson or broker concerned
What checks can be done on distribution channels where the insurer has high acquisition costs? And how can you improve this?
The number of quotations produced vs the actual business acquired should be monitored and managed (want a high conversion rate). The following can be done to increase the rate of sales per quotation:
* Improve info provided on the quotation - do comparisons with competitors’ versions
* Provide additional sales support services, if it would improve sales efficiency
* Try a different sales method
* Try altering the product design and/or price - in case these are the cause of decline in popularity
What is an insurer’s aim with regards to persistency?
They want to minimise the volume of lapses and surrenders - to achieve this, the company should monitor the experience, especially by distribution channel, to identify problem areas.
What are ways to improve persistency?
DASCSR
- Change distribution channels
- Aim to maintain or improve the quality of ongoing admin and contact with the PH
- Sales methods improvements so that policies are sold more strictly to meet customer needs
- Alternative commission structures that encourage persistency
– Lower initial commission and higher renewal commission
– Commission clawback systems - Identify systematic reasons for lapses and surrenders and impose suitable management strategies to avoid the trend continuing
– e.g. targeting the wrong types of individuals, not fully meeting their needs - Restricting premium payment methods (e.g. to direct debit)
How should a company manage their NB volumes and mix?
- It must ensure that it has adequate capital and administrative capacity to sell its NB.
- It must monitor volumes and mix compared with pricing assumptions
– Excess volume can indicate inadequate capital
– Low volume will reduce total profit and increase the per-policy cost of overhead expenses
– Lower than expected case size may uncover per-policy expenses
How can an insurance company monitor the mix of business from a capital efficiency POV?
It needs to monitor the mismatch between charges/loadings and expenses.
* Reduce the mismatch through
— Restricting or encouraging certain product lines and/or distribution channels, directly by structural change or indirectly by remuneration arrangements, level of other support given to the distribution channel, or the literature used to market to PHs
— Reprice or redesign contracts, including the possibility of an increased minimum premium
It needs to monitor premium frequency
* Single premium has the least NB strain - all initial expense loading received on day 1 of the policy
* Regular premium has the most NB strain - only a proportion of total initial expense loadings received in a given period
It needs to monitor the valuation strain
* Arises when a policy is sold because the combination of supervisory reserves and SCRs tend to place a higher value on the net liabilities than the pricing basis
* This results in initial reserves and required solvency capital exceeding the initial AS when the policy is issued, thus causing the strain
How can volume and mix of business be controlled?
- Appropriate marketing, especially with regard to remuneration and targeting of distribution channels
- Product design
– Matching charges
– Premium frequency
– Minimum premiums
– Guarantees (significantly affects the extent of valuation strain) - Sales channels can also be encouraged
– Through rewards systems - to achieve particular sales targets, though care must be taken not to conflict with other aims (such as persistency targets) or to be unprofessional
What are the two major types of options given under LI policies?
- Financial options: Guaranteed annuity option – convert lump sum into annuity @ min conversion rate
- Mortality options: The right to make alterations or additions to benefits without further medical evidence required
What are important items to monitor with regards to options?
- The take-up rate
- Profit/loss arising following the take-up
On what does the decision to provide options depend?
- On the extent to which they are appreciated by the PH and hence contribute to sales
- On the burden of cost they place on the company
What are good control measures for the management of options?
- Increase charges/loadings that are paid for the option
- Alter the benefits or terms of the option
- Remove the option from NB
What are possible mitigation options for onerousness of options?
- Appropriate reserving
- Strict interpretation terms (subject to TCF)
- Using derivatives
- Buy back from the PH
What are actuaries’ roles in the decision-making process?
To identify, quantify and illustrate the risks and rewards of various courses of action.
To explain all actions that can be taken to reduce the key risks.
Once risk management strategies have been agreed, they should be:
- Well documented
- Well interpreted
- Monitored continually for effectiveness
What is ERM?
An integrated approach to RM which considers the risks of the business as a whole, rather than considering individual risks in isolation. Holistic integrated approach to RM.
Elements of ERM:
* Allows for concentration of risk arising from a variety of sources with an organisation to be appreciated
* Allows for diversification of risks
* Recognition that value can be added to business through educated risk-taking, with a strong RM framework that better allows companies to identify and assess strategic opportunities
What RM strategies can be used to reduce the risk of adverse experience on a new product?
- Limit the maximum sum insured that you offer.
- Offer a term product, rather than whole of life, or a shorter term.
- Do not guarantee the premium rates.
- Reinsure a significant portion of the new product, until you have credible experience.
- Add an extra profit margin.
o However, the product will still need to be competitive. - Limit the number of policies you sell. This can only be crudely managed by adjusting marketing spend.
- Ensure that you have a very quick feedback loop on the claims experience.
- Ensure you have the ability to monitor the experience by the relevant factors.
- Use longer waiting periods to reduce anti-selection.
- Increase claims underwriting to eliminate invalid claims.
