Chapter 7 Product design and stakeholder interests (2)

Question 1

Stakeholders

Answer 1

• Insurers
• other internal parties
• regulators
• distributors
• other external parties eg actuarial profession

Question 2

Insurer’s targets in Product design and pricing (8)

Answer 2

• Customer acceptability
• regulator requirements
• needs of distributors
• price competitiveness
• adequate profitability
• company culture in product style
• systems and other internal constraints
• underwriting methodology
• risk pricing
• financing requirements
• cross-subsidies
• cost of offering guarantees
• premium/benefit change at renewal/review

Question 3

Customer acceptability

Answer 3

• Product should be designed to meet customer needs
• product must be clear about
  1. benefits provided in terms of claims triggers
  2. the amounts & variability of premiums

Question 4

Regulatory requirements

Answer 4

• regulator may have requirements on product design
• new contracts may need to be approved before launch.
• premiums may be need approval from regulator.

Question 5

Needs of distrbutors

Answer 5

• Product should be capable of being sold via normal sales methods.
• Consultation with sales consultants is important.
• Product should be competitive in order to achieve sales targets.
• Actuaries should involve sales & marketing teams in early in design of products.
• This will give the actuary insight in customer needs.
• Actuary may also be involved in training sales consultants about product features and commission structures, etc.
• Premium reviews scope as well.

Question 6

Adequate profitability/ RoE

Answer 6

• profit = amount sold * profit margin per policy
• sufficient margins should be retained also competitiveness should be maintained.
• premiums should cover profits + expenses + claims

Question 7

Company culture in product style & price

Answer 7

• consistency with other products
• company may wish to ensure the charging & benefit structure of new policy are at least similar to existing business.
• major changes may lead to development of systems.

Why:

• Less cost in
• • systems development
• • sales literature
• • sales training
• Being fair to existing policyholders vs new

Question 8

Systems and other internal constraints

Answer 8

-Actuary must be aware of system implications when coming up with a new product. There may be constraints.

-The key considerations are:
1.systems must record of process of insurance
2.provide info to enable profit assessements
3.new products may require systems reorganisation.
4.any launch may require reappraisal of priorities
5.expenses relating to system changes must be
included in product costing.
6.time must be allowed for dev & testing.
7.communication with key system decision maker.

Admin systems
-system requirements of a product may limit either benefits or charging structure to be adopted.

Question 9

Systems & other internal constraints: Data capture

Answer 9

• Information technology must:
• capture individual policy details at inception
• align these to claims info
• combine policy & claims date to monitor profit
• group by risk traits
• be able to add external data
• be able to model and project

Question 10

Underwriting methodology

Answer 10

-Medical underwriting
-Is very important aspect to premium determination.
-eg excl of pre-existing conditions is crucial to
product development & premium charged.

-Importance of underwriting
-more important for long-term policies with
guaranteed premiums.

-Claims underwriting
-insurer should use this in pricing & product design
process.
-claims procedures should be consistent with underwriting used to accept a policy at inception stage.

Question 11

Risk pricing

Answer 11

• Actuary will estimate likely benefit outgo from contract design. Most update data is needed.
• Statistics may vary by product & territory.
• Reinsurer assistance may be of particular importance.

-Risk characteristics
-the level of risk brought by contract should be considered.
-The risk should be within the insurer’s risk appetite if
above the reinsurer excess risk.

-Reinsurance
-decision to reinsure will be part of pricing process, eg
helps determine policy limits.
-inexperienced insurer may rely heavily on reinsurer.

Question 12

Financing requirement

Answer 12

• Insurer wants capital efficient products if it doesn’t have a lot of capital.
• Unit-linked products reduce financing requirements.
• Guarantees have a big influence on the reserves that need to be established.

Question 13

Cross-subsidies & equity

Answer 13

• Product design will involve combining risks & averaging premiums out.
• order for certain product lines to sell it may be necessary to spread expense contributions across product lines.
• The actuary need to ensure rights of different classes of policyholder to security of benefit are not diminished by cross-subsidies.
• the rights includes bonuses of with-profit contracts.

Extent of cross-subsidies

• company needs to decide on the extent of any cross-subsidies between large & small contracts.
• Marketing advantage of a simple premium may conflict with desire to avoid cross subsidies.

Question 14

Cost of guarantees

Answer 14

• Offering guarantees results in two problems
  1. possibly having to suffer cost that you did not fully expect.
  2. probably having to reserve for this possibility from the outset - increasing capital strain.

Question 15

Guidelines to consider in offering guarantees

Answer 15

• ensure there is a customer need
• price as accurately as possibly
• charge cost of capital to product
• obtain sound reinsurance
• ensure that marketing and other policy literature is clear
• ensure sales process explains clearly
• ensure adequate reserves are in place.

Question 16

Premium or benefit change on renewal or review

Answer 16

• A large measure of insurer control under healthcare is usually at renewal/review.
• at this stage an insurer will compare past experience to that expected.
• results of this analysis & variations will determine extent to which premiums & benefit will be changed.
• where analysis indicates benefits must be reduced/premiums increased insurer must be wary of resultant selective lapsing.
• compare to what competitors are doing.

Question 17

Conflicts between product design factors

Answer 17

• the design factors are not independent of each other.

- Meeting the one may prejudice meeting the other, so a compromise must be struck.

Question 18

Insurer as a stakeholder: CI insurance

Answer 18

• Insurer must be on guard against anti-selection and moral hazard.
• Insurer should also avoid paying out unnecessarily on death since this is not priced into policy. Hence a 28 day survival period can be introduced.
• a sufficient reserve is required for late notified claims
• controls needed in managing PRE when new diseases are discovered.

Question 19

Insurer as a stakeholder CI Insurance( Tiered benefits): Problems in designing tiered benefit levels

Answer 19

• It is difficult to set additional stages of diseases that trigger both legally & medically objective while being considerate to the consumer.
• Weaknesses in definitions could lead to more claims even if probabilities are as anticipated.

Question 20

Insurer as a stakeholder CI Insurance( Tiered benefits):

Problems in pricing benefits

Answer 20

• finding statistics for current definitions is difficult enough, with historic insurance experience being limited.
• having to find 4 times as many severity levels & transition probabilities between them is challenging with any degree of accuracy.
• the uncertainty margins required may make product expensive.
• underlying incidence & transition rates may change in future before credible data is collected.
• there will be many overlaps between diseases that will make pricing more complex.
• actuary faced with these risks is likely to prefer absence of any guarantees or significant margins in assumptions and co-operation with a knowledgeable reinsurer.

Question 21

Insurer as a stakeholder CI Insurance( Tiered benefits): Problems in underwriting

Answer 21

• Initial underwriting should become more stringent and this requires time and money.
• claims manager will be faced with more claims forms with more complex definitions. More expertise will be needed.
• Initially there may be no consistency within the market. Judgment will be applied in accepting claims.

Question 22

Insurer as a stakeholder: Long-term care insurance

Answer 22

• The insurer needs to have flexibility in contract design and provisioning such that future changes in State’s attitude does not cause loss that has not been costed.
• Also, policyholder perceptions that contract provides care not cash benefits.
• insurer must allow prudently for possible extra claims outgo. Claims may be ruled by regulator in favour of clients where disputes arise.

Question 23

Insurer as a stakeholder : Private medical insurance

Answer 23

• Insurer can reprice contracts annually, have control over the price.
• However insurer doesn’t have complete control over the benefit payouts since these are to 3rd parties like hospitals.
• Insurer may pre-agree on fees and certain types of treatments to control costs.
• An insurer can require approval of treatment before care is given. Cost of reimbursement can be discussed prior to treatment.
• Medical inflation increases at greater rate than CPI which consumers are familiar with. This makes it difficult to convince consumers of the increase in premiums.

Question 24

The rate of medical inflation is a function of the following (5)

Answer 24

• an ageing population
• lack of sufficient supply of hospital bends or medical practitioners pushing up prices.
• move to newer and more expensive treatments or drugs
• greater propensity for policyholders to claim following a perceived deterioration in state facilities.
• increases in medical staff salaries.

Question 25

Regulator as a stakeholder

Answer 25

• The regulator’s priorities are:
  1. insurers remain solvent
  2. consumers are considered in all decisions & that any disadvantage to policyholders is eradicated totally.
• it is a requirement that insurers submit adequate and accurate reports to enable regulator to insurer intergity & solvency appropriately.
• ensures policy wording is not ambiguous.
• products should provide value for money when comparing costs vs premiums.
• sales process will be monitored to ensure customer needs are met. There is no undue pressure : cooling off periods
• monitor if product is sold to intended target i.e. customer needs are met.
• regulator may require approval before premium increases are implemented.

Question 26

Stakeholders: Other considerations

Answer 26

• Professional guidance
• when designing and pricing products the actuary must comply with any actuarial guidance that is applicable to the territory of the operation.
• both the actuarial body to which the actuary belongs to & the body presiding over the territory which the actuary exercises their judgment.

Question 27

Risk management

Answer 27

• Ensuring clear set of conditions and policy rules
• Sufficient and relevant data (for pricing and monitoring)
• Appropriate reinsurance
• Minimising financing requirements
• Consideration of equity between policyholders
• Consideration of cross-subsidies between contracts
• Being aware of guarantees offered
• Premium reviews (for reviewable/renewable policies)