Exam Questions Flashcards

Question

A student in the analytics team at a large health insurer is carrying out an analysis of experience on the previous year’s hospital claims using a generalised linear model (GLM). The student has developed two potential models. The two models are identical except for the second model having both income band and geographic location as additional factors. (i) List two properties of the exponential family of distributions which make them particularly useful when using a GLM. [1] (ii) Explain which two tests can be used to analyse the significance of the additional factors in the second model. [2] (iii) List two other checks that should be carried out before including additional factors into a model. [1] **[4 marks]** ## Footnote GLM; ASSA NOV 2015; Q2

Answer 1

i. o The distribution is completely specified in terms of its mean and variance.✓✓ o The variance of Yi (the response variable) is a function of its mean.✓✓ ii. The two models are nested models.✓ o Where the scale parameter is known✓, the χ2 test✓ for the change in scaled deviance✓ can be used. o Where the scale parameter is unknown, the F statistic can be used✓ as the ratio of the change in the deviance✓ and the scale parameter estimate✓ is distributed with an F-distribution✓. iii. * Consistency of the factor over time.✓✓ * Consistency of the factor with other factors.✓✓

Answer 2

The principal methods are: **Capitation basis** [½] This is the practice of charging for cover by forecasting the likely claims on an individual basis and charging this, adjusted for expenses and profit, as the premium. [½] In effect, the insurance company “carves out” dental claims and passes this risk onto the provider, by giving a proportion of the insurance premium for each person managed to the dentist up-front rather than an amount per claim. [½] The dentist estimates the cost for each patient. [½] Risk to the dentist is twofold: the number of patients requiring treatment may be higher than expected [½] and the cost of treatment increases faster than expected. [½] **Indemnity basis** [½] The insurer covers pound for pound the treatment delivered . [½] subject to any excess or policy limits [½] Insurers work closely with dentists to ensure that applicants are screened initially for pre-existing conditions [½] or imminent treatment [1/4], and to ensure that dental intervention thereafter is in accordance with risk expectation. [½]

Answer 3

* General Practitioner consultations. * Dentistry benefits (consultations and minor treatments). * Eye care benefits (consultations, tests, lenses, frames). * Preventive healthcare services, such as vaccinations and health screenings. * Wellness programs, such as nutrition counselling. * Chronic disease management, such as diabetes and hypertension management. * Maternal and child healthcare services, including prenatal care and paediatric care. * Mental health and behavioural health services, including counselling and therapy sessions. * Telehealth services, including virtual consultations with healthcare professionals. * Home healthcare services, including nursing care and rehabilitation services. * Prescription drug coverage, including generic and brand-name medications. * Basic radiology such as X-rays. * Pathology such as blood tests. * Rehabilitation services, including physical therapy and occupational therapy. * Alternative medicine services, including acupuncture and chiropractic care. * Health education and counselling services, including smoking cessation and stress management. * Minor procedures in the General Practitioner’s room. *0.5 each, max of 8.*

Answer 4

*The key here is to identify what the State can do that insurers find difficult, impossible or are unwilling to do.* A State system can provide care and treatment for both acute and chronic conditions. [1⁄2] An insurer will find it difficult to cover chronic conditions because of the very high expected claims costs. [1⁄2] A State system can allow cross subsidy between individuals. The expected costs of an individual’s benefits could therefore be significantly greater than what would be expected given his or her contributions. [1⁄2] Insurers can only allow cross-subsidy to a limited extent, especially in a competitive market. [1⁄2] A State system can make a “loss”, provided this can be funded from tax revenues or other sources. [1⁄2] If insurers sell products at a loss, this can only be in the short term. [1⁄2] A State system can provide benefits for those whose current state of health would make them uninsurable (eg those with genetically-related illnesses, or with HIV). [1⁄2] Insurers would usually need to refuse insurance to such cases because of the high expected claims cost. [1⁄2] A State system can provide cover for those who have dangerous jobs (eg those in the fire service). Insurers might find it necessary to quote special terms for such people. [1⁄2] A State system can provide accident and emergency services. [1⁄2] Insurers may impose conditions, such as pre-authorisation and/or preferred provider arrangements, that would make it impractical (or impossible!) to cover accident and emergency services. [1⁄2] A State system can provide benefits for individuals who would not be able to afford to purchase insurance themselves. [1⁄2]

Answer 5

(i) RPx = (SA) * (ix) * (rx) ✓✓ Where: SA = Sum assured, ✓ RPx = Risk premium for a life aged x ✓ ix = incidence rate across all conditions (sum of individual incidence rates) for age x ✓ rx = probability of surviving the survival period; ✓✓ i.e. the 28-day survival rate given a diagnosis of a CI for age x.✓ ii) - Total claims are expected to reduce.✓✓ - By the proportion of people expected to die within 28 days of diagnosis.✓✓ - However, with the improvements in diagnostic technology and treatment.✓✓ - It is expected that fewer and fewer people will die over time within the survival period.✓✓

Answer 6

i) - Logistic Regression **[1/2]** - Mortality is a binary outcome **[1/2]**, logistic regression models such 0,1 outcomes well **[1/2]** Link function: linear predictor, η(x) = ln( μ / (1 - μ ) ) **[1/2]** …otherwise stated: g(μ) = ln( μ / (1 - μ ) ) **[1/2]**

Answer 7

- The insurer can use the savings to implement lower premium increases over the coming few years, ✓✓ i.e. subsidise premium increase✓ to stay attractive and to keep policyholders happy ✓, or potentially decrease premiums✓ (depending on what competitors are doing)✓ - The insurer can improve benefit richness ✓✓ i.e. offer additional benefits✓ or higher limits✓ or lower co-pays✓ - The insurer may retain the savings as a capital buffer✓ in case experience worsens after the epidemic✓ ,e.g. likely pent-up demand for elective surgeries✓ – so additional reserves to fund these makes sense✓. - The surplus can be applied to grow the business✓✓ – allow for the new business strain of selling more policies✓ - Other strategic initiatives✓ (mergers/acquisitions/new products)✓✓ may be pursued - Screening/wellness benefit enhancements✓ – due to many seemingly having foregone primary healthcare✓ and may be in poorer health than they are aware of✓, - and to try and prevent further downstream catastrophic healthcare costs ✓✓ - The profits may be distributed to the shareholders – or part thereof distributed (declaring a dividend).✓✓ - Part of the profits can be distributed to staff/management in the form of bonuses.✓✓ ## Footnote *Think of PHs, SHs, staff and growth*

Answer 8

(i) Benefits to include The sum insured should be linked to the salary of employees, eg it may be a multiple of salary. [1⁄2] A clear definition of an accident is needed, [1⁄2]... ... and this definition should be clearly explained in the policy documentation. [1⁄2] A table of benefits will set out the percentage of sum insured for different injuries (eg loss of limb, sight etc). [1⁄2] A full payment of the sum insured for total disability and/or a full payment for death may be included. [1⁄2] Benefits may also include * medical expenses (if allowed) [1⁄2] * cover for spouse and other dependants. [1⁄2] (ii) Risk factors that may be used in determining the premium include: * age * gender * job description * dangerous pursuits. [1⁄4 each, total 1] These risk factors may be used to assess the risk profile of the employees and to determine broad risk categories to be used for differentiating premiums. [1⁄2] Premiums can also be differentiated by employment category, eg full time, part time. [1⁄2] Underwriting Since it is voluntary, employees may choose whether or not to take out cover, therefore there is a risk of anti-selection. [1⁄2] However, since the benefit is only paid in the event of accidental disability (or death), the risk of anti-selection is reduced. [1⁄2] Extensive underwriting will be expensive, as these costs may be high relative to the premium rates for accident cover, [1⁄2]... ... which are expected to be low compared to other health and care insurance products). [1⁄2] Therefore underwriting is likely to be relatively simple and not too intensive. [1⁄2] Possible options for underwriting and acceptance include: * a declaration of health by the applicant [1⁄2] allowing employees to enter with no underwriting when first employed by the mining company (but not subsequently) [1⁄2] a short medical questionnaire including questions relating to risky leisure activities (eg sky diving), assuming they are not excluded from the policy. [1⁄2] Loadings can then be applied to employees that pose significantly higher risks. [1⁄2]

Answer 9

**iii.** * Group PMI involves the sale of a single policy to the employer.The employer, as policyholder, purchases the insurance protection for the employees, on their behalf.✓✓ * In worksite marketing, the workplace is being used as a convenient way of accessing a large number of potential individual clients.✓✓ o Those who do buy policies will have invidual contracts with the insurance company; they will pay the premiums✓✓ and the contract will exist independently of whether or not they remain in that particular employment.✓ * Under a group PMI contract it is unlikely for any employee to remain covered by the insurance once they have left that employment.✓✓ **iv.** It diversifies the risk pool✓✓, for example, the company could get exposure: o In different economic sectors of the market✓ o In different geographic regions✓ o Of active workforce members✓ ▪ who are generally in good health✓ ▪ and of a pre-pensioner age✓ * It reduces anti-selection✓ and thereofore reduces claims risk✓ o In individual PMI business, it is the broker/customer who is ‘initiating the sale’✓, ie voluntarily selecting a policy contract that is in their best interest✓. o This is contrasted against group PMI where the employer selects the group cover for its employees✓, which is often a condition of employment✓ (ie a strong element of compulsion), thereby significantly reducing anti-selection risk✓.

Answer 10

UK APR 2021; Q2 (ii)

Answer 11

i. **limit exposure to risk**✓… * …if the book of business is new✓ or the insurer is new to writing this type of risk✓ they may want to limit their exposure initially to each risk (QS or individual surplus/XoL✓) * Or on the overall book✓ – stop loss/aggregate XoL✓ * …any changes in the burden of disease✓ may mean greater uncertainty for the insurer so they may wish to limit the risk through reinsurance✓ **Avoid large single losses**✓… * …increased burden of disease✓ or new technologies✓ or pandemic effects (i.e. long COVID)✓ may influence claim trends✓ **Smooth results**✓… * …while the insurer is large, the critical illness book could be small and/or new ✓✓… * …this means higher variability in experience✓ **Provide expertise**✓✓ … * …especially if new to the market or significant market changes✓✓ **Increase capacity to accept risk**✓… * …increased capacity helps the insurer write a variety of business✓ * … or larger risks✓ than it would otherwise be happy to accept * …niche market✓ * …group versus individual ✓ **Provide financial assistance**✓... * …e.g. reinsurance commissions✓

Answer 12

Income: premiums, interest. ✓✓✓ Outgo: expenses, commission, expected claim costs, tax. ✓✓✓✓✓

Answer 13

ii. Assumptions of the classic linear model: * Error terms are independent and come from a normal distribution (√√) * Mean is a linear combination of the explanatory variables (√) * Error terms have constant variance (homoscedasticity) (√) iii. GLM advantages over the classic linear model: * More general than just the Normal Distribution as a GLM can take on any distribution from the exponential family e.g. Poisson, Gamma, Tweedie (√√) * Using a Link function, can take account of the multiplicative nature of explanatory variables and their effects and transform them to linearity, as opposed to a classic linear model which assumes the effects of the explanatory variables are additive. (√√) * The variance of the response variables (Yi’s) is a function of its mean (√) and can often increase with the value of its mean (√) e.g. the Poisson distribution (√) and as is usually the case when modelling claim amounts)(√)

Answer 14

* The Light CI does not cover as many conditions/illnesses as the Comprehensive CI and so we would expect the claim incidence to be lower.✓✓ There may be a sense of lethargy✓ in claiming as policyholders are not as aware✓ of the rider benefit as they are of the stand-alone✓ since the main benefit purchased was the death benefit✓. There may be an element of anti-selection in the stand-alone CI benefit✓ as policyholders who are more likely to claim (past family history)✓ would want to take out this cover. This is made worse if the underwriting measures of CIRUS Life are not adequate to screen for these sorts of risks✓✓ (for example ask questions about family history)✓. This may not be present in the rider benefit as the main intention of taking out the cover is the death benefit.✓✓ It may be purely chance that the risk profiles differ and that the Light product has healthier individuals than the Comprehensive✓✓ – however, unlikely given the product features✓. Survival period in the Rider benefit may result in claims not being admitted that would otherwise happen if the Standalone benefit doesn’t have a survival period.✓✓ Mortality experience has been higher than expected on the rider population which results in deaths occurring before expected CI events.✓✓

Answer 15

The model must be valid and sufficiently rigorous for the purposes to which it will be put, and adequately documented. [1⁄2] The model points chosen must be such as to reflect adequately the distribution of the business being modelled. [1⁄2] Alternatively, the company’s actual policy data file could be used, provided the software was able to handle the computations effectively. [1/4] The components of the model must allow for all those features in the business being modelled that could significantly affect the advice being given. [1⁄2] The parameter values chosen should be appropriate to the business being modelled ... [1⁄2] ... and take account of the special features of the company and the economic and business environment in which it is operating. [1⁄2] The model should exhibit sensible joint behaviour of model variables. [1⁄2] The workings of the model should be easy to appreciate and communicate. The results should be clearly displayed. [1⁄2] The outputs from the model should be capable of independent verification for reasonableness [1⁄2] ...and should be readily communicable to those to whom advice will be given. [1⁄2] The model should not be overly complex so that either the results become difficult to interpret and communicate, ... [1⁄2] ... or the model takes too long or becomes too expensive to run. [1⁄2] Any shortcomings of the model should be clearly stated. [1⁄2] The model should be capable of subsequent development and refinement. [1⁄2]

Answer 16

UK APR 2020; Q3

Answer 17

iii. * Group PMI involves the sale of a single policy to the employer✓✓. The employer, as policyholder✓, purchases the insurance protection for the employees✓, on their behalf. * In worksite marketing, the workplace is being used as a convenient way of accessing a large number of potential individual clients.✓✓ o Those who do buy policies will have invidual contracts with the insurance company✓✓; they will pay the premiums✓ and the contract will exist independently of whether or not they remain in that particular employment✓, * Under a group PMI contract it is unlikely for any✓ employee to remain covered by the insurance once they have left that employment✓. iv. * It diversifies the risk pool✓✓, for example, the company could get exposure: o In different economic sectors of the market✓ o In different geographic regions✓ o Of active workforce members✓ ▪ who are generally in good health✓ ▪ and of a pre-pensioner age✓ It reduces anti-selection✓ and thereofore reduces claims risk✓. o In individual PMI business, it is the broker/customer who is ‘initiating the sale’✓, ie voluntarily selecting a policy contract that is in their best interest✓. o This is contrasted against group PMI where the employer selects the group cover for its employees✓, which is often a condition of employment✓ (ie a strong element of compulsion)✓, thereby significantly reducing anti-selection risk✓.

Answer 18

Solution X2.6 (i) Comparing the two commission structures Method (a) reflects more closely the effort put in by the intermediary, who puts in most work to sell a new policy, and less work to get it renewed. [1⁄2] This will probably be popular with intermediaries who will therefore be encouraged to sell your policies. [1⁄2] Method (a) will encourage intermediaries to sell new policies, which may match the insurer’s aims and targets for the volume of sales. The lack of new-business incentive under method (b) may deter sales and could be a significant problem for this method. Method (b) will automatically reward the intermediary according to the duration of the policy (whether a long-term policy for a fixed number of years or a short-term policy that is renewed for a number of years), ... ... this should reflect the total profit contribution of the policy to the insurer ... [1⁄2] ... whereas in (a) the initial commission would have to be variable according to policy term to make it fairer (though this would not be difficult to do). [1⁄2] Method (b) puts more emphasis on renewal, which should help persistency. [1⁄2] Under (a), policies that lapse early are not likely to have recouped the cost of the initial commission paid out, ... [1⁄2] ... which could cause significant losses for the insurer if persistency is poor. [1⁄2] Poor persistency could therefore create significant problems for the insurer under method (a). [1⁄2] The high initial commission under method (a) also worsens the financial strain incurred on new business, ... [1⁄2] [1⁄2] [1⁄2] [1⁄2] ... because this leaves less money available to cover the supervisory reserves and solvency capital that will have to be set up. (ii) Improving the structure No method will be of any use unless intermediaries sell the insurer’s policies, so method (b) will generally be improved by introducing higher commission in the first year, which turns it into method (a)! [1⁄2] To address the persistency problem, commission clawback could be introduced. [1⁄2] This means that, if a policy lapses during a specified period from issue (eg within the first three policy years), a proportion of the initial commission has to be repaid to the insurer. The amount repaid will be proportionate to the length of the specified period (the earnings period) that is outstanding at the date of lapse. This reduces the loss to the insurer on early lapse, ... [1⁄2] [Maximum 5] [1⁄2] [1⁄2] [1⁄2] ... and further encourages the intermediary to look after his or her clients more carefully, so (hopefully) reducing lapse rates as well. [1⁄2] The default of an intermediary will mean that any subsequent or outstanding commission clawback on business already written will not be honoured; but this is still less of a problem than without clawback in the first place. [1⁄2] This risk might be reduced by carrying out credit checks on the intermediaries. [1⁄2] Well capitalised companies may be happy to incur the strain provided that a suitable return on that capital can be achieved. [1⁄2] Another alternative is to issue single premium contracts, ... ... in which case lapse will be much less of an issue, ... ... and capital strain will also be significantly improved. [1⁄2] [1⁄2] [1⁄2] The disadvantage of this is that they may not meet policyholders’ needs, and so might not be marketable. [1⁄2] [Maximum 5]

Answer 19

In this instance the reserve is likely to be small✓✓ since the CI policies do not carry any surrender or maturity benefits✓ (there is no savings element)✓ and are term policies✓. The benefit therefore of depositing back a proportion of the small reserve is therefore limited.✓ And may result in more costs✓, paperwork, admin✓ which outweighs the advantages✓ of having a deposit-back arrangement.

Answer 20

This could have a number of effects on the experience: The main effect of earlier diagnoses resulting from improvements in diagnostic technologies would be earlier payment of benefits✓✓, which would worsen the experience✓. This is because policyholders would receive the lump sum payout earlier✓, and the insurer would have to pay out the benefit for a longer period✓ (if there is an annuity portion)✓. Potentially more policies which are claimed on✓ in absolute terms, as some people may not have otherwise been diagnosed✓, again worsening the experience✓. For tiered benefits✓, earlier diagnosis would mean that the severity of claims would be reduced✓, potentially resulting in better experience✓. This is because policyholders would receive a lower lump sum pay-out for less severe illnesses✓, and the benefit would be paid out earlier✓. If treated and prevented from worsening to stages triggering higher pay-out, further improvement in experience can be expected✓✓. However, for non-tiered benefits, this would mean that claim sizes remain the same✓, but with earlier payments✓. As a result, reserves might be insufficient to cover the payment.✓✓ It would also mean that the experience would be worse than before.✓✓ UNLESS, claims definitions require greater severity✓ – then diagnostic technology would actually reduce claims incidence rates if early diagnosis translates into successful treatment✓✓. Leading to the number of cases reducing rather✓. The overall result on a non-tiered benefit structure would thus depend on the claims definitions✓✓. For tiered benefit structures, there would also likely be a worsening at lower benefit levels.✓✓

Answer 21

In the same way as ordinary least squares regression, a GLM can be used to model the behaviour of a random variable that is believed to depend on the values of several other characteristics√. The generalised linear model (GLM) is a flexible generalisation of ordinary least squares regression√. The GLM generalises linear regression by allowing the linear model to be related to the response variable via a link function√ and by allowing the magnitude of the variance of each measurement to be a function of its predicted value√.

Answer 22

* It does not allow for the proper timing of events.✓✓ * It does not allow for the accumulation of reserves.✓✓ In fact, reserves are ignored completely when using this approach.✓ * It does not properly allow for capital needs.✓✓ It is not possible to allow for the desired rate of return required by shareholders on their capital.✓ In effect we assume that any capital needed can be borrowed at the discount rate used.✓ This is important for capital implications.✓ * It does not allow for the impact of net negative cashflows in any period.✓✓ * It does not allow for separate inspection of premium-related cashflows or claim-related cashflows.✓✓ We cannot track expenses, claims, premiums etc separately each year.✓ * It does not allow easily for variation of assumptions over time.✓✓ The approach uses one fixed discount rate, whereas investment returns might vary over time.✓ * It does not allow for changes in the assumed future experience✓✓ and cannot be used to measure the sensitivity of profit to such variations.✓ * It cannot easily allow for more complicated product structures✓✓, eg UL✓. ii. - Critical illness products do not have significant capital requirements.✓✓ - And given the low incidence of claiming they are unlikely to have significant reserving requirements.✓✓ - The product has a simple trigger, and a defined sum assured.✓ Therefore, the claims-related cashflows do not necessarily require detailed inspection.✓ - However, given the longer term nature✓ of the product it may be necessary to consider how assumptions change over time✓. - In addition, the option to continue cover without underwriting✓ requires a more detailed approach✓ to consider the impact of the option and of anti-selection✓. More sophisticated techniques required for pricing options✓, e.g. stochastic modelling, conventional method or North-American method✓. - Timing of event✓ (if happens at all)✓ is important. - Therefore, a formula approach is not appropriate for pricing this product.✓✓

Answer 23

**Policy / Premium term:** * PMI is generally a short-term product, the premiums on PMI are generally renewable annually [½] * CI is generally a long-term product, the premiums on CI can be guaranteed or * reviewable periodically throughout the policy term. e.g. after every 5 years [½] **Benefit cover:** * PMI normally pays out to cover the expenses incurred during medical treatments [½] * typically for acute illnesses (and may generally exclude chronic and terminal * illnesses) [½] * CI is normally paid upon the diagnosis of a critical illness as set out in the policy * terms [½] * and the conditions are generally lifestyle threatening [½] * PMI may cover an individual risk (policyholder) or a family [½] * CI usually covers individual risks (policyholders) [½] * although children’s benefits might also be provided [½] **Claims:** * PMI indemnifies the policyholder [½] * and payments are normally paid directly to the healthcare providers [½] * CI normally pays a lump sum which is determined by the policyholders at outset [½] * and is payable directly to the policyholders [½] * PMI allows for multiple claims during the policy term (usually a year) [½] * Under CI, usually only a single claim is possible [½] * unless the CI lump sum is in the form of tiered benefits, i.e. a set proportion of the * total sum assured will be payable based on the severity of the critical illness [½] * PMI cover may be subject to limits [½] * For CI, claims terminate the policy (unless it is tiered) [½] [Marks available 9, maximum 4]

Answer 24

The data could be used to model how the various explanatory factors have an impact on the response.✓✓ In this case, explanatory variables would be: ▪ Age✓ ▪ Sex✓ ▪ Chronic status✓, or can use the number of chronic conditions, since this is now available✓ ▪ Whether they are part of National or Martingale (if available)✓ The response variable would be cost PLPM✓✓ The GLM can then be fitted to this✓, and the resultant model used to estimate costs based on the inputs of explanatory variables in a situation✓. Factors to consider (not exhaustive): o Inclusion of interactions✓ o Statistical significance of the✓ coefficients modelled o Link function used✓ ii. ii. **Potential benefits:** o Handles risk cells with small volumes well, as it uses the full data.✓✓Also means that more granular levels of risk differentiation can be considered.✓ o More stable transitions between levels of risk.✓✓ o Gives control over interactions considered.✓✓ o Can easily assess different combinations of explanatory variables.✓✓ o Accounts for the effects of other explanatory factors in calculation of effect sizes.✓✓ **Potential pitfalls:** o If influential points affect coefficients, the impact spreads beyond the single cell that the influential point lies in.✓✓ o Potential for model error if not specified correctly.✓✓ o Requires some statistical understanding to be able to use (as opposed to risk cells which are straight averages).✓✓ o Might not capture correct shapes of relationships✓✓ → risk cells may overfit though.✓ o One-way views may call out areas of concern that might not otherwise be detected if just looking at GLM outputs.✓✓

Answer 25

Managed Care aims to manage claim costs✓ while maintaining or even improving✓✓ access to quality healthcare services.✓ The system integrates the delivery and financing of healthcare✓✓ by providing the insurer with some control over the healthcare SPs through provider networks.✓✓

Answer 26

Tiered benefits✓: A tiered benefit structure can help mitigate the impact of improvements in diagnostic technologies on the insurer's liability. In a tiered benefit structure, the lump sum payout varies based on the severity of the illness✓. This means that if a policyholder is diagnosed with a less severe form of a covered critical illness, the insurer would pay out a lower benefit, reducing the liability✓. Deferred period✓: The deferred period is the period between the diagnosis and when the benefit becomes payable.✓ Adjusting the deferred period can also help account for the impact of earlier diagnoses. For instance, if the deferred period is longer, the insurer would have more time to adjust its reserves and manage its risks effectively✓✓. o Waiting period: Longer waiting periods✓✓ – from the date of policy inception, to when a claim will be accepted✓ can avoid anti-selection✓ and early diagnoses due to diagnostic advances. o Update Claim Definitions in Policy Wording✓: The insurer can ensure that their claims definitions are clearly defined at what severity a valid claim is payable✓ – this would remove ambiguity✓ as well as act to control at what point a reserve✓ needs to be set up by removing the possibility of lower severity claims not accounted for in the valuation basis. o Product exclusions✓✓: Another way to account for the potential impact of improvements in diagnostic technologies is to add exclusions to the product. Exclusions can be added for illnesses that are not covered under the policy✓ or for illnesses that are covered but are more likely to be diagnosed early✓. o Updating underwriting assumptions✓: Insurers may need to update their underwriting assumptions to reflect the potential impact of earlier diagnoses✓ on the claims experience. This could involve reviewing the mortality and morbidity rates for different critical illnesses and adjusting the premium rates accordingly✓✓. o Adding risk factors: Insurers can add risk factors to the underwriting process✓✓ to account for the potential impact of improvements in diagnostic technologies. For instance, the insurer may ask policyholders about their family history or lifestyle factors that may increase their risk of developing a covered critical illness✓✓. o Health and wellness programs: Insurers can offer health and wellness programs to policyholders as a way to encourage them to maintain a healthy lifestyle and reduce their risk of developing a covered critical illness✓✓. This can include access to preventive screenings, healthy living tips, and fitness programs✓✓. By promoting health and wellness, insurers can help reduce the incidence of critical illnesses and, in turn, reduce their liabilities✓✓.

Answer 27

Coinsurance – can be either quota share✓ or surplus✓ whereby all aspects of the original contract are shared✓... ...hence the premium is split between the insurer and reinsurer in a fixed proportion✓✓ and the claims are split in the same proportion✓. This means the reinsurer will generally share in full risks of the policy✓✓ including investment✓ and early lapse✓. ## Footnote *A disappointing number of students did not mention anything about sharing lapse or investment risk.*

Answer 28

More general than just the Normal Distribution✓ as a GLM can take on any distribution from the exponential family✓ e.g. Poisson, Gamma, Tweedie✓✓. * Using a Link function✓, can take account of the multiplicative nature✓ of explanatory variables and their effects✓ and transform them to linearity✓, as opposed to a classic linear model which assumes the effects of the explanatory variables are additive✓. * The variance of the response variables (Yi’s)✓ is a function of its mean✓ and can often increase with the value of its mean✓✓ e.g. the Poisson distribution✓ and as is usually the case when modelling claim amounts✓.

Answer 29

Deposits back – when the supervisory authority✓ requires the reinsurer to deposit back its share of the total reserve✓ to the cedant✓ under a reinsurance arrangement✓ with the cedant. Even if not a requirement✓, this is sometimes done so that the cedant can maintain the reserve✓ and maximise the funds to invest✓ while still getting benefit of reinsurance✓. The arrangement will also mitigate against reinsurer default risk✓✓. The reinsurer can also benefit if it is a large international reinsurer✓ and wants to avoid investing in an unfamiliar market✓. The overall result is that the reinsurer only in effect covers the (reinsured part of) the sum insured over and above the reserve (called the sum at risk).✓✓ It makes the arrangement generally more profitable to the ceding company, as it will retain all of its potential investment profit.✓✓ Improves trust between insurer and reinsurer.✓✓ May have mutually beneficial balance sheet effects.✓✓

Answer 30

Own salesforce **Suitable because:** Members of an own salesforce are usually employees of the insurance company,they should therefore have been trained to have detailed knowledge of the product [½] They are therefore well placed to explain the complex CI product features to potential policyholders [½] For group business, Company A’s own salesforce agents may already have an established client base [½] who are likely to be the smaller companies and individual customers [½] who may find the cost of services provided by a specialist group insurance broker too expensive [½] **May not be suitable because:** The salesforce may be remunerated by commission or salary or a mixture of both [½] If the fixed salary component of the remuneration is high, there could be less incentive to try and sell a complex product [½] It is unlikely to be suitable for targeting the large corporations [½] Worksite marketing **Suitable because:** This may be suitable if the workforce of the employers to which Company A is given the permission to target are sophisticated. [½] The working population might be an appropriate target market for individual products such as individual CI and individual PMI. [½] For budget Individual PMI, worksite marketing will be cost efficient and potential customers should be able to understand all the product features for simple individual PMI products. [½] **May not be suitable because:** This method may only be suitable for certain employers with sophisticated workforce, or the sophisticated section of the workforce within the employers. [½] Some products would be too complex to explain to the entire workforce of an employer [½] and it would be challenging to ensure that they all understand the product features adequately for them to fully understand and make the appropriate decision. [½] Such products may include tiered benefits standalone CI [½] and a comprehensive Individual PMI product. [½] It will not be suitable to try to sell individual PMI products to a workforce that is already covered by a group PMI policy. [½] It is unlikely to be suitable for targeting employers who are the direct customer (i.e. for group business). [½]

Answer 31

- Incidence rates✓ at each age✓ for each covered condition✓ - 28-day Mortality rates✓ for diagnosis at each age✓ (modelled?) - Risk margins ✓ - Expense loadings ✓ - Commission ✓ - Contribution to profit ✓ - Discount rate ✓ - Solvency capital requirements ✓✓ - Cost of capital ✓✓ - Assumptions around volume of business✓ (for spreading overheads)✓ - Assumption around mix of business (where cross subsidies exist)✓

Answer 32

Multivariate modelling using is necessary when modelling multiple factors that are likely to be related or correlated to a certain extent.✓✓ If these interdependencies are not taken into account, there is a risk of over- or understating claims.✓✓ Examples of factors used in modelling health insurance claims that are likely to be correlated: * age & family size ✓✓ * age & chronic conditions ✓✓ * maternity & gender ✓✓ *(any two of the above examples)*

Answer 33

(i) + A unit-linked product tends to be less risky than a conventional product as some of the risks are shared with customer. [1⁄2] However, may be additional risks associated with the guarantees offered. [1⁄2] + It may be more acceptable to review premiums and benefits under a unit-linked design. [1⁄2] + A unit-linked structure allows for more accurate pricing [1⁄2]... + ... and permits a more complex benefit design. [1⁄2]...*(so it is easier to differentiate from competitors???)* + There may be lower capital requirements for a UL product depending on the design of the product and the level of guarantees. [1⁄2] – The main disadvantage is that unit-linked products are more difficult to understand. [1⁄2] (ii) + The PMI benefit covers cost of acute treatment and cover for chronic conditions may be limited ...[1] ... whereas CI can provide additional cover for ongoing medical expenses. [1⁄2] + PMI only covers medical expenses [1⁄2] ... whereas a CI benefit can be used to cover other costs, ... [1⁄2] ... such as debt, income loss, lifestyle adjustment etc. [1⁄2] + Expenses will be lower for the combined product. [1⁄2] + Anti-selection may be lower, because individuals will buy cover against general medical expenses, rather than covering themselves for particular illnesses. [1⁄2]

Answer 34

(i) Differences between a group contract and an individual contract Group business is insurance covering a number of individuals under a single policy document. [1⁄2] There is often a sponsor, such as an employer or other body, who is the policyholder in a group scheme. Individuals own their own (separate) policies. [1⁄2] [1⁄2] However, an individual policy might also cover immediate family members on a joint life basis. Only those belonging to the group (eg employees working for the same employer, trade union members) may buy cover under a group arrangement. [1⁄2] Individual policies are sold without restriction. [1⁄2] Group schemes are short-term contracts, often one-year renewable and at most may be guaranteed only for two or three years. [1⁄2] Long-term individual policies are likely to have a term that lasts for many years. [1⁄2] Premiums for individual policies use individual rating factors (eg age). [1⁄2] Premiums for group policies usually use both individual and group (eg type of industry) rating factors. [1⁄2] [1⁄2] Premiums for group policies are often partly determined using the experience of the group. Premiums for individual policies usually do not use the individual experience to determine premiums (although there are exceptions, eg NCD schemes). [1⁄2] There will generally be less medical underwriting on group contracts compared to individual contracts to reflect the lower risk of anti-selection. [1⁄2] In particular, an individual joining a group scheme will only be underwritten if the cover exceeds the free cover limit. [1⁄2] Group schemes usually have benefits determined using a fixed formula (eg related to salary). [1⁄2] Individuals are free to choose their own cover, subject to financial underwriting. [1⁄2] [Maximum 6] (ii) Advantages and disadvantages to individual of joining a group scheme + less strict underwriting, so more likely to obtain cover at standard rates + premiums will usually be lower than those for similar individual cover [1⁄2] [1⁄2] + premiums often paid by the employer, although employees may be taxed as if the premium was part of their income (so the cover is not totally “free”) [1⁄2] – benefits will usually be limited and may be determined by a fixed formula, so it is difficult to match the cover to individual needs [1⁄2] – cover only continues while the individual is a member of the group (eg if the individual losses their job, he or she will need to purchase their own cover) [1⁄2] – cover may be restricted to the individual (eg a joint policy including spouse may not be available) [1⁄2] [Maximum 2]

Answer 35

This is a new product so it will not be covered under existing reinsurance treaties [½] This may be the first time that the insurer is exposed to the group insurance market [½] and/or PMI business [½] As such, it may lack the experience of writing the business [½] and may require significant external technical support, which could include [½] Availability of expertise on pricing, e.g. [½] underwriting support for hazardous occupational classes [½] setting rating factors for different occupational classes [½] setting free cover limits for different group size & profile [½] renewal process set up for group business [½] setting credibility factors based on group size to determine renewal premiums [½] setting criteria for maximum cover allowed [½] expertise on product design, and [½] expertise on claims management system development [½] Limiting exposure to risk / Provide protection against accumulation of risk, for example [½] exposure to particular groups / industries, or [½] exposure to medical cost inflation [½] Increasing capacity to write new business such as large risks (i.e. single risks) [½] and also increasing capacity to write more risks (i.e. cumulatively), which is particularly relevant for a new product [½] Smoothing results [½] which is particularly important for a small insurer [½] Financial assistance [½] this may be particularly important for a small insurer and/or a new product [½] and such assistance could be used to help with new business strain [½] Allow greater volumes of new business to be written by the insurer than would be possible using only its own capital [½] Allow greater diversification of the company’s business by writing more new business than would be possible if there was no reinsurance available [½] Reducing solvency capital requirement [½] Financial or tax arbitrage [½] It could be a statutory requirement [½] Take advantage of good reinsurance rates in the market / reinsurance is good value [½]

Answer 36

UK SEP 2020; Q7 (ii)

Answer 37

Embedded value can be calculated as the sum of: the present value of future shareholder profits [½] in respect of the existing business of a company, [½] The shareholder-owned share [½] of net assets [½] where net assets are defined as the excess of assets held over those required to meet liabilities. [½] These assets may be valued at market value [½], or may be discounted to reflect “lock-in”, [½] for example, if they are required to be retained within the fund to cover solvency capital requirements. [½] The process of determining this amount is similar to performing a profit test,[½] bearing in mind that some elements will not be applicable (e.g. new business expenses). [½] The calculation may differ for different types of business for example: [½] Conventional without profits business: the present value of future premiums [½] plus investment income [½] less claims and expenses, [½] plus the release of supervisory reserves. [½] Unit-linked business: the present value of future charges (including surrender penalties) [½] less expenses and benefits in excess of the unit fund, [½] plus investment income earned on [½] and the release of any non-unit reserves. [½] For with-profits business, embedded value is effectively the release of any margins within the supervisory reserves relative to the assumptions used within the embedded value calculation. [½] It is important that the reserves used in the determination of net assets are consistent with those used in the determination of the present value of future profits. [½] Tax is allowed for within the calculation as appropriate. [½] [Maximum 6]

Answer 38

Multivariate modelling using is necessary when modelling multiple factors✓✓ that are likely to be related or correlated to a certain extent✓✓. Examples of factors used in modelling health insurance claims that are likely to be correlated✓: a. are age and family size✓ b. age and chronic conditions✓ c. maternity and gender✓

Answer 39

**LTCI** * The benefit is not linked to the cost of care✓ – lump sum and not indemnity✓ * There is a risk that the policyholder may have misunderstood the benefits at purchase, resulting in inadequate cover when care is required.✓✓ * Due to the cost of indemnity benefits, the alternative may not have been possible.✓✓ * Care is normally required for months to years✓, depending on the circumstances, and the lump sum may not be sufficient to provide for the cost of care for the length of time care is required✓. * Certain forms of care will require accommodation in costly facilities✓ and/or specialist nursing care✓. o The cost of these (for the duration which care is required for) may well significantly exceed the lump sum.✓ o Further, the cost escalations may exceed the CPI+2%, exacerbating the problem over time.✓✓ *(Benefits are not keeping pace with actual costs of treatments.)* * Given that the benefit is escalating over time, the premiums are likely to escalate in a similar fashion.✓✓ o If CPI is high relative to the policyholder’s income growth over time, premiums may become unaffordable.✓ * If converting the lump sum to an income, the annuity rates available at the time may be unfavourable, resulting in a lower level of income.✓✓ o Similarly if investing the lump sum independently✓, risk of poor returns may render the income generated insufficient✓. **CI** * The risk that cost escalation (in their needs) exceed CPI+2%✓✓ - whether this be salaries, mortgage repayments, cost of treatment/care/lifestyle changes,✓✓ etc. * Risk of contracting a CI that is not covered, or does not fulfil the policy criteria.✓✓ o But still impacts the policyholder’s ability to earn a future income✓, or they may require expensive treatment, fund lifestyle changes,✓✓ etc. **Other** * Risk of insolvency of insurer✓ – long term products✓. * Significant regulatory changes✓ requiring substantial changes to their benefits✓.

Answer 40

Cancer might be excluded under the policy as it is a chronic rather than an acute condition [1] If cancer is not excluded then assume that PMI policy benefits would include the new treatment. [½] Frequency/number of claims: If the announcement of the cure does lead to more people being worried about their health and seeking medical consultations then the diagnosis rate will increase [½] or a national screening program may be introduced [½] and there will be more claims due to lung cancer. [½] Not only will there be more claims relating to lung cancer treatment, but the cost of these claims will be higher as the new treatment is more expensive [½] and the duration of the treatment may be longer [½] With more people seeking medical consultations then, even if they are not diagnosed with lung cancer, then they could be diagnosed with other conditions which could lead to claims for other types of cancer or other medical conditions. [½] Overall, the present value of claims increases [1] If the policies cover the cost of the test, this would increase the claims cost further. [½] The increased survival rates for individuals who would have previously died from lung cancer may increase the future premiums/charges received by the insurer offsetting some of the additional claim costs. [½] As the treatment will be available in 6 months then it does impact the existing business, even if this is only 12 month contracts (as is typical for PMI business). [½] Supervisory reserves increase [½] relating to lung cancer treatments is now higher than when the premiums were set. [½] This leads to an instantaneous decrease in net assets at the valuation date and a reduction in the EV. [½] As the future risk period progresses, future releases of reserves could be bigger or smaller than currently. [½] To calculate an appropriate adjustment to the reserves, estimate how many more claims and additional costs of these claims will be made. [½] E.g. Analyse the percentage of insured members who smoke if this can be deduced from available insured member information. [½] The additional cost per case will be the difference between the cost of the new treatment and the cost of the existing treatments. [½] Policies are typically annually reviewable so the premium could be reviewed at the next renewal date to reflect the higher expected future claims. [½] However, the EV would typically not include the value related to future renewing business which had not formally renewed (i.e. not included if no signed contract at the EV valuation date). [½] The EV (through the PVFP element) has less significance for shortterm business such as PMI. [½] [Maximum 6]

Answer 41

ASSA NOV 2022; Q6

Answer 42

* Select products for their clients from all or most of those available in the market.✓✓ * Must act independently of any particular insurace company✓ (although they can be owned by one).✓ * Their aim is to find the contract that best meets situation of their clients.✓✓ * They may be remunerated via commission payments✓ (by the companies whose products they sell)✓ or they may alternatively receive a fee from their clients✓. ii) * Insurance distributors can gain marketing access✓ to all the individual members of a particular group, such as the employees of a particular company✓. * The distributor aims to attract those who have not made their own insurance provision for healthcare needs✓ and do not have adequate employer-paid cover✓.

Answer 43

The principles of investment: (a) A company should select investments that are appropriate to the nature, term and currency of the liabilities. [½] (b) The investments should also be selected to maximise the overall return on the assets, where overall return includes both investment income and capital gains. [½] The extent to which (a) may be departed from in order to meet (b) will depend, among other things, on the extent of the company’s free assets, [½] and the company’s appetite for risk. [½] Alternatively these principles can be expressed also as: ‘The company should invest to maximise the overall return on the assets, subject to the risk taken on being within the financial resources available to it.’ [1] *[Total marks available 3, maximum 2]*

Answer 44

i) Risk discount rate (RDR) It is the rate used to discount future cashflows to give their present value. It represents the risk-free rate of return required by the provider of capital ... ... plus a margin in respect of the variability of the future cashflows valued. It is used in profit testing and embedded value work. (ii) Determing the RDR using CAPM The main problem with choosing a risk discount rate is determining suitable risk margins. The CAPM is one way of quantifying the extra margin required by shareholders of investing in this company. [1⁄2] Under certain conditions the CAPM gives:  Er E r im    where: EE r i ii   is the expected return on asset i (eg the company’s shares, as it is a proprietary company) r is the market return on a risk-free asset Emm  Er is the expected market return (eg the stock market) [1⁄2] [1⁄2] [1⁄2] [1⁄2] [1⁄2] [Total 2] [1⁄4] [1⁄4] [1⁄4]  i is the “beta factor” of asset i (the covariance of ri and rm divided by the variance of rm) – a measure of the relative volatility of asset i. [1⁄4] The risk margin is (Ei – r). So the CAPM is saying that this is proportional to the company’s beta factor. [1⁄2] The historic beta factor can be measured using market data, and it is reasonable to assume that the beta factor now / in the near future will be that of the past, ... [1⁄2] ... although it could be modified to take account of expected changes. [1⁄2] The expected market return can be represented by the return on a mixed portfolio of shares, or on an appropriate index. [1⁄2] The risk-free asset can be represented by short-term government bonds, ... [1⁄2] ... although for the long-term liabilities under critical illness and long-term care insurance, long-term government bonds will be more appropriate. [1⁄2] The above approach takes no account of the specific risk entailed in the asset (ie the company’s shares). (iii) Use of the risk discount rate The risk discount rate will be used to discount projected future cashflows to give a net present value (NPV) for the expected profit from the product. [1⁄2] It is possible to use different risk discount rates for different elements of the cashflows to represent their potential variability. [1⁄2] For example, investment income and long-term care claim cashflows are typically more variable than mortality experience, and so these cashflows might be valued using a higher risk discount rate than that used to value term assurance claim payments. [1⁄2] The risk discount rate will also be an element of the profitability criterion: ● [1⁄2] If net present value of future profits is used, this might be expressed as a percentage of the expected present value of future premiums, also discounted at the risk discount rate. [1⁄2] ● ● If an internal rate of return (IRR) is used, the product’s IRR might be compared against the risk discount rate. [1⁄2] The determination of the discounted payback period will need to be done using the risk discount rate. [1⁄2] [Maximum 3]

Answer 45

* the pandemic is more likely to impact the level of claims…✓✓ * ….whereas the processing patterns/development factors are more likely impacted by effects on operational functions…✓✓ * …for both hospitals and providers * if operational functions remain unchanged then development factors should be unaffected…✓ * …but may be applied to higher or lower claim levels depending on any pandemic infection “waves”✓ * if the pandemic causes more complexity and limited capacity in staffing and system operation….✓✓ * …development factors may show slower run-off trends✓ …development factors may show faster run-off trends if lower non-pandemic related claims mean faster operations and claims processing✓✓

Answer 46

Insurance intermediaries **Suitable because:** Brokers aim to find the contract that best meets the specific needs of customers, and they are well placed to provide specific advice to individual customer in addition to just explaining the product features [½] For example, advice on ‘tiered benefits’ regarding individual policyholder’s needs and how these might be catered for under a tiered benefit product [½] Such services are likely to be expected by the brokers’ client base [½] Brokers are likely to sell to financially sophisticated customers [½] and so are able to sell complex products such as the tiered standalone CI product [½] Brokers are also likely to sell to more affluent customers [½] and who are likely to take out policies with reasonably high CI benefits [½] who are less likely to be overly concerned about the level of commissions payable to the brokers as long as it is not excessive and in line with market practice [½] Customers would want to be provided with options, and an independent broker would be able to provide options from various insurers [½] For group products, the employer purchases group covers on behalf of the employees, so the direct customer is the employer [½] and the employers, in particular the large corporations, are likely to appoint a broker to help purchase their insurance cover [½] as the employers would prefer having insurance advisory from another established institution such as an insurance broker [½] For GPMI the broker may provide a number of important services to the insurer, such as: (½ mark for any two examples below) * Communication with the employers * Data gathering for pricing and underwriting * Premiums collection and claims payment * Any other services that may help reduce administrative work for the insurer **May not be suitable because:** There is a risk that the brokers may recommend the insurer who provides the highest commission, which may not be Company A’s product [½] The commission may be too high for the smaller companies (for group business) or individual policyholders (for individual business) seeking low benefit cover [½] So the brokers are unlikely to have the smaller companies or individual policyholders seeking low benefit cover on their book [½] Company A may therefore need to use other sales methods to target the smaller companies and individual policyholder seeking low benefit cover [½] Tied agents **Suitable because:** Tied agents are likely to be financial professionals who should have good understanding of the product and be able to explain the complex product features to potential policyholders. [½] They may typically be the employees of a bank or other similar financial institution. [½] and CI products are suitable to provide protection to cover loans / mortgages [½] so there is good opportunity to sell a CI policy at the same time when the tied agent’s potential customers make a loan / mortgage application [½] For group business, tied agents may already have established relationships with certain employers [½] where some employers may be existing customers of the financial institutions to which tied agents belong. [½] In particular if the employers concerned are the smaller companies or individual PMI customers who may find the cost of services provided by a specialist group insurance broker too expensive. [½] **May not be suitable because:** The terms or commission required by tied agents could be relatively high [½] as they are “tied” to one, or sometimes several insurance companies. i.e. exclusive agreement normally comes with a cost. [½] For group business, the larger employers would prefer the services and options of insurance quotes provided by the specialist group insurance brokers. [½] It is therefore unlikely to be suitable for targeting the large corporations. [½]

Answer 47

(i) - Morbidity charge ✓✓ - Expense charge ✓✓ (allocated premium less BO spread) - Fund Management charge ✓✓ - Policy Admin charge ✓✓ (ii) **Morbidity**✓✓ o Inception rates per covered condition✓✓ o By rating factor✓ eg age, gender, occupation✓✓ o Likely to vary by sum assured✓ o May need to supplement with reinsurance experience✓✓ o Needs to have margin for cost of capital associated with guaranteed sum assured✓✓ **Investment charge** o Experience analysis of direct investment costs✓ o Likely to vary per investment portfolio✓ e.g. more for equity and overseas exposure✓ **Management charge**✓ o Need to conduct full expense analysis✓✓ o Including direct and indirect costs✓✓ o Including claim settlement costs✓ (allowing for reinstatements)✓ **Policy fee**✓ o May be an upfront charge to recover initial sales costs✓✓ o An policy issuing costs✓ - Charges need to be competitive✓✓ - May be a requirement for disclosure✓✓

Answer 48

**Advantages** Those over age 60 are frequent users of medical services. [1⁄2] Encouraging these people to provide their own care may relieve some of the demand on the State services, ...[1⁄2] ... particularly if they seek treatment in private hospitals, and perhaps in hospitals in another State. [1⁄2] This will be of positive benefit to the State system if there is currently excess demand for medical treatment. [1⁄2] The tax change is effectively a State subsidy on premiums. The cost of this subsidy may be less than the cost of treatment that would otherwise have been borne by the State. [1] The premium subsidy may result in those over age 60 becoming more aware of their health, and taking better care of themselves. [1⁄2] This will have the effect of reducing the long-term costs of medical treatment. [1⁄2] It will be popular with taxpayers over age 60. [1⁄2] **Disadvantages** Tax revenues to the State will be reduced. [1⁄2] If there are limited medical resources, particularly medical staff, this may have the effect of increasing funding for the private sector and attracting staff away from the public sector. [1⁄2] It may force up wage levels of medical staff, which could make the change more expensive than anticipated. It may undermine sympathy and support for the State system. [1⁄2] It will not be an incentive for all those aged over 60 because not all these people will pay tax. [1⁄2] Those who pay tax will be the more affluent, and so the subsidy favours the better off at the expense of the poor. [1⁄2] Those under age 60 may complain or lobby for the subsidy to be extended to them. [1⁄2] There are administrative costs of organising the subsidy. [1⁄2]

Answer 49

It diversifies the risk pool✓✓, for example, the company could get exposure: o In different economic sectors of the market✓ o In different geographic regions✓ o Of active workforce members✓ ▪ who are generally in good health✓ ▪ and of a pre-pensioner age✓ * It reduces anti-selection✓ and therefore reduces claims risk✓ o In individual PMI business, it is the broker/customer who is ‘initiating the sale’✓, ie voluntarily selecting a policy contract that is in their best interest✓. o This is contrasted against group PMI where the employer selects✓ the group cover for its employees, which is often a condition of employment✓ (ie a strong element of compulsion)✓, thereby significantly reducing anti-selection risk✓.

Answer 50

UK APR 2023_Q1 (ii)

Answer 51

Demographic profile of the target market✓✓, such as age, gender, and location✓✓, to tailor the benefit package to their specific healthcare needs.✓✓ Prevalence of diseases and health conditions that are most common in the target market.✓✓ The availability of primary healthcare facilities in the target market✓✓, and the quality of care provided by these facilities.✓ The cost of primary healthcare services in the target market✓✓, and the affordability of these services to the target market.✓ The degree of competition in the primary healthcare market✓✓, and the price sensitivity of the target market.✓ The scope of primary healthcare services that are currently covered by other health insurance products in the market.✓✓ The regulatory requirements for health insurance products in the market✓✓, and the level of compliance required for the new product.✓✓ ## Footnote *Common mistakes made by the candidates include lack of specificity in addressing the specific factors to consider when designing the benefit package for a primary healthcare insurance product, providing superficial analysis without in-depth explanations or examples, overlooking important factors such as customer acceptability and the competitive landscape, insufficient discussion on regulatory considerations and the integration with state benefits, and the use of vague language and generalisations. These mistakes resulted in less precise and less effective responses that did not fully address the question's requirements.*

Answer 52

UK APR 2022; Q1 (i)

Answer 53

Economic pessimism and high unemployment will encourage some employees to claim for particular treatments under group PMI policies, in case they lose their jobs and are then no longer able to benefit from the insurance. So this will increase claim costs. [1⁄2] Lower unemployment may mean tighter labour markets, resulting in an increased demand for group PMI schemes as employers seek to hire and retain key employees. [1⁄2] High inflation will result in increasing claims costs, which will cause premiums to increase significantly. [1⁄2] This could reduce policy renewal rates and the demand for new business. [1⁄2] Greater general health awareness (eg government campaigns) may increase demand for PMI. [1⁄2] Improvements in State medical provision will reduce the demand for PMI. [1⁄2] Increasing prosperity will increase disposable income, resulting in an increased demand for PMI. [1⁄2] [Maximum 3]

Answer 54

**claims in transit reserve…**✓✓ * …ongoing benefit payments for BetterCare✓✓ **outstanding claims reserve**…✓✓ * …no settlement delays for BetterCare benefits✓✓ **incurred but not enough reported claims reserve (IBNER)**✓✓… * …benefits known upfront for BetterCare✓✓ **equalisation or catastrophe reserve**…✓✓ * …pre-defined benefits/not indemnity✓✓

Answer 55

**Reasons for the deterioration in persistency Experience [½]** Company A should investigate the reasons for the deterioration in persistency experience. [½] The adverse persistence experience in the early durations may be more influenced by sales practices such as commission structure. [½] Sales practices may not have such implications on persistency experience in later durations, which are more likely to be influenced by unsatisfactory service standards, [½] or external factors such as economic downturn, regulatory changes, etc. [½] Reputation may have also been affected by deteriorating capital position or credit ratings. [½] For CI with reviewable premiums, there could have been significant increase in premium rates following the recent premium reviews. [½] The trend of poor persistency could also be a market-wide problem, where CI products may be perceived as no longer meeting the customer need as a result of mis-selling scandal / adverse press and media coverage [½] **Advantages of the level commission system:** Company A’s indemnity commission structure may not have the clawback system in place to provide intermediaries with the incentives to keep lapse experience down. [½] Even if there is clawback system in place, it may not be effective to incentivise intermediaries to improve the persistency experience. [½] The renewal commissions may not be sufficient to provide the intermediaries with the financial incentives to maintain their policies on the book after the commission clawback period. [½] The regular commission system could therefore be able to address the problem if the deterioration in persistency experience was mainly within the commission clawback period. [½] The change is likely to promote a migration from hunters to farmers in terms of distributor behaviour [½] **Disadvantages of the level commission system:** Level commission is likely to be less popular with distributors as it does not meet their expenditure as well as indemnity commission. [½] **Market standards:** Consider the standard commission structure in the market, and whether competitors generally using level commission or indemnity commission. [½] Investigate whether insurers using the level commission system have better persistency experience than insurers using the indemnity commission system. [½] Consider what the distribution channels’ reaction would be with a level commission system, in particular that the general market standard is to use the indemnity commission system. [½] Distributors may prefer the existing system as the proposed level commission system may be perceived to increase uncertainty in terms of commission paid. [½] Approval from regulator may be required. [½] **Pricing and Systems:** Premiums may need to be adjusted to reflect the level commission accordingly. [½] This may also mean that marketing literature has to be revised at a cost. [½] Systems will need to be updated to reflect the new commission system, and there may also be implications on maintenance expenses due to the additional process of paying regular commission. [½] Removal of indemnity commission will reduce the level of new business strain. [½] Level commission would match commission outgo to premium contribution and to timing of profitability more appropriately. [½] Need to think about whether this change will impact the business mix.(???) [½] **New business volumes / Profit:** Consider the likely effect on new business volumes (if the change is unpopular, new business volumes might fall). [½] Consider the likely effect on profits as a result of the different commission system and/or selling a different volume of business. [½] Consider the number of sellers to whom this applies, e.g. if most sales are through direct marketing, then the effect of changing commission structure might be small. [½] Consider any tax implications caused by the different commission structures as the timing of the tax relief on level commissions would be different from that on indemnity / upfront commissions. [½] ## Footnote *Tips: This is a discussion question so include the details about advantages and disadvantages of each structure. Also, for these questions, remember to say something about hunters and farmers!*

Answer 56

- protect consumers of financial services ✓✓ - prevent financial crimes ✓✓ - Address information asymmetries ✓✓ - ensure confidence in the system✓ - correct perceived market inefficiencies✓ and to - promote efficient and orderly markets ✓✓

Answer 57

* Statistical approach is appropriate for BetterMed✓✓ * …run-off triangle data is for specific homogeneous groups of claims✓ * …BetterMed is large and well-established✓ * …claims data shown in run-off triangle appears stable✓ * …aim would be to calculate IBNR✓ * …BetterMed has a sufficient set of claims data✓ * For BetterCare, case-by-case may be more appropriate✓✓ given heterogeneity between cases✓; large policies✓; irregular (large variation)✓ in run-off patterns✓, long-term products✓, etc.

Answer 58

**CI** The main risk relates to the rates of diagnosis of the critical illness specified in the contract.✓✓ Other major risks include: Anti-selection risk✓ Selective withdrawals✓ Financial risk on withdrawals✓ where asset share is negative✓ **PMI** The benefit payments are generally determined by individuals over whom the company has no control✓✓ (eg increases in fees, increases in cost of treatment)✓. Claim frequency bound up in GP referrals.✓✓ Where the State offers free healthcare✓, there may be risks arising from lack of sales✓ and inability to cover expenses✓ which could lead to insolvency✓. Risk of a single large claim✓ (treatment in USA)✓ or a single incident leading to accumulation of claims✓ (eg workforce✓) **LTC** The main risk relates to transfer probabilities✓ in the underlying multiple state model✓ and to claim inception probabilities✓ and transfer probabilities between claim states✓. Other major risks include: Investment risk✓✓ Expense risk✓ Withdrawal risk✓ - selective withdrawals✓ Financial loss from withdrawal when asset share is negative.✓✓ Marketing/reputation risk✓ since policyholders expectations may not be met in the underlying multiple state model and to claim inception probabilities and transfer probabilities between claim states.✓✓

Answer 59

* It does not allow for the proper timing of events.✓✓ * It does not allow for the accumulation of reserves.✓✓ In fact, reserves are ignored completely when using this approach.✓ * It does not properly allow for capital needs.✓✓ It is not possible to allow for the desired rate of return required by shareholders on their capital.✓ In effect we assume that any capital needed can be borrowed at the discount rate used.✓ This is important for capital implications.✓ * It does not allow for the impact of net negative cashflows in any period.✓✓ * It does not allow for separate inspection of premium-related cashflows or claim-related cashflows.✓✓ We cannot track expenses, claims, premiums etc separately each year.✓ * It does not allow easily for variation of assumptions over time.✓✓ The approach uses one fixed discount rate, whereas investment returns might vary over time.✓ * It does not allow for changes in the assumed future experience✓✓ and cannot be used to measure the sensitivity of profit to such variations.✓ * It cannot easily allow for more complicated product structures✓✓, eg UL✓. ii. - Pre-funded Long Term Care products are expected to have a significantly long term of reserve building before payment starts.✓✓ - And have significant capital requirements for those offering indemnity benefits.✓✓ - The accumulation and release of reserves are a key component of this product.✓✓ Given that the product will likely go through a premium payment state, a paid-up state and a claiming state through its life cycle.✓✓ - This means that there will be a need to vary assumptions depending on the various states in which the policy is.✓✓ - Timing very NB✓ as it significantly affects the value of reserves build-up✓ and length of claiming state✓, and will have a large impact on pricing✓. - This means that a formula approach will not be appropriate for pricing this type of product.✓✓

Answer 60

Risk XL✓ o Covers losses up to a specified limit✓, after which the reinsurer takes over✓. o Relates to individual losses✓… o …affecting only one insured risk at a time✓… o Useful where large individual losses sometimes occur✓ Aggregate XL✓ (or Stop Loss)✓ o Similar to risk XL✓ but covers a whole portfolio of losses instead of individual✓ o …above an agreed limit✓ or attachment point✓… o …and up to an agreed detachment point✓… o …for a 12-month period✓… o …comprising one or several classes of business✓ o Can provide protection against a series of losses that are not individually large enough to trigger a Risk XL, but that accumulate over time to exceed the attachment point.✓✓ Catastrophe XL✓ o Covers a defined common cause✓ or peril✓ (single event)✓ o Over a particular time period✓, usually 72 hours for example✓ o Can cover losses from natural disasters✓ or other catastrophic events, and is usually structured to cover losses that exceed a certain monetary threshold✓ or that affect a certain geographic area✓.

Answer 61

- Accelerator, rider or stand-alone benefit.✓✓ - May be a traditional without-profit product✓, indexed premiums or benefit✓ or unit-linked product✓. - Tiered benefits✓✓ – variations in whether benefits are tiered or not✓, the number of tiers✓ and the differentials in sum assured in the tiers✓. - Whether multiple reinstatements are permitted or not✓ - Variations in the number and types of diseases covered.✓✓ - Cover terminating at different ages✓ - Variations in definitions of diagnoses✓ - Variations in deferred period✓ - Speciality benefits✓ – women only✓, children’s benefit add-on✓, TPD✓/terminal benefit✓

Answer 62

**Incidence rates**✓ May increase over time✓, resulting in more claims than expected✓ Greater awareness✓; early detection✓; diagnostic technology improvements✓ o Particularly a problem if rates offered are guaranteed✓✓, which is often the case, and the product is long-term✓, exacerbating this risk **- Survival rates**✓ Higher than expected✓, resulting in more claims than expected✓ Mortality✓ and treatment improvements✓ over time Again problematic when guarantees have been offered/long-term✓ **- Competitive risk**✓ Risk that competitors design and market a similar product which is found more attractive✓, resulting in low business volumes✓ (difficult to cover overheads)✓ or **lapses** (which is problematic if the asset share is negative)✓ resulting in losses✓ **- Low marketability of product**✓ Not found attractive by target market✓ – low demand✓ Low appetite for intermediaries to market✓ Mis-selling risk if commission out of line with that of competitors✓ i.e. higher✓. May sell to persons for whom product does not meet needs in order to get commission✓✓ - **Reputational damage**✓ if product does not meet needs and found to have been mis-sold✓. - Claim disputes✓ around the survival period✓ may also cause reputational damage if policyholders utilise social media for complaints✓ **- Selective lapses**✓ Healthy lives lapse policies, leaving the insurer with a greater concentration of policyholders who are more likely to claims✓✓ **- Anti-selection**✓ – insurer’s underwriting may be inadequate to pick up on certain forms of anti-selection/moral hazard✓ – results from genetic tests✓, family history✓, other risk factors✓ May be exacerbated for a stand-alone policy such as this✓ - **Large initial outlay**✓ (product design, systems development, training, etc.)✓✓– may not be recouped if product fails to sell well✓ - Regulatory risk if regulation changes✓ or prohibits certain forms of underwriting✓ or imposes maximum premiums✓, commission✓, etc. - {no marks for investment risk – small reserves}

Answer 63

Long term contract which may or may not have fund protection✓, and which may or may not offer indemnity benefits✓: o Fund protection refers to the underlying unit fund not being used to fund benefits and insurance benefits are payable from the non-unit fund.✓✓ The level of fund protection can vary.✓ o The greater the fund protection, the greater the liquidity risk✓✓. - The benefits may be paid as a single payment, or series of payments and may be payable for life✓✓. - With significant uncertainty✓ in the timing of the benefit✓ and the length of time✓ for which the benefit will need to be paid (longevity risk)✓. - There is liquidity risk if benefit payment sooner than expected✓ or for longer than expected✓; exacerbated if indemnity and not stated sums✓✓. - Benefit amount may be linked to performance of underlying investments if there are no guarantees and no/limited fund protection.✓✓ o If unit fund is benefit, then liquidity risk is reduced, because can simply realise the assets underlying.✓✓ o Any investment or insurance guarantees significantly increase the risk.✓✓ - In which case investment risk is a significant factor✓ – will impact pricing✓ and require greater levels of liquidity✓. - Need to forecast benefit payments under various scenarios.✓✓ - To determine appropriate investment strategy✓ – amount of cash holding✓. - Since return on cash lower, too much cash will impact investment return.✓✓ - And too little will mean risk of having to realise investments at inopportune time.✓✓ - Some liquidity risk also stems from the expenses of administering the policy.✓✓

Answer 64

iii. **Proportional reinsurance** shares the risk for all claims✓ (experience of reinsurer follows the fortunes of direct writer)✓✓ in some proportion✓ o QS – fixed proportion✓ o Surplus – proportion differs based on retention limit compared to sum assured✓ * Appropriate for a new book of business✓ * Or where capital not sufficient for expanding the book of business✓ * For CI cover there may be variation in severity and frequency.✓✓ * Could use surplus reinsurance✓ when there is a fixed maximum amount per risk that the insurer wishes to retain per policy.✓ **Non-proportional reinsurance** provides protection against larger claims.✓✓ o Either on individual policies (Individual XoL)✓ or in aggregate (catastrophe cover, aggregate XoL/ stop-loss).✓✓ * Insurer may be more concerned about claims where sum assured is large, i.e. excess of loss cover.✓✓ * Or risk of accumulation of claims, i.e. stop loss.✓✓ * Appropriate cover will depend on risk appetite✓, solvency✓, reinsurance cycle✓, strategic objectives✓. *("rsrs")* * May also use a combination of proportional and non-proportional cover.✓✓ ## Footnote *Marks were not given for general definitions but only where there was some element of application to the question. The discuss aspect of the question guides candidates to need to consider their responses and motivate accordingly which was often not done.*

Answer 65

- GP visits ✓✓ - Specialist visits ✓✓ - Scopes and scans ✓✓ - OTC/prescription medication ✓✓ - Chronic condition management ✓✓ - Optical benefits (tests, lenses, frames, contacts) ✓✓ - Dental benefits (visits, minor treatments, etc) ✓✓ - Maternity benefits (scans, tests check-ups) ✓✓ - Screening tests/benefits ✓✓ - Basic radiology ✓✓ - Pathology ✓✓

Answer 66

- GP visits ✓ - Specialist visits ✓ - Scopes and scans ✓✓ - OTC/prescription medication ✓✓ - Chronic condition management ✓ - Optical benefits (tests, lenses, frames, contacts) ✓✓ - Dental benefits (visits, minor treatments, etc) ✓✓ - Maternity benefits (scans, tests, check-ups) ✓✓ - Screening tests/benefits ✓ - Basic radiology ✓ - Pathology ✓

Answer 67

A contingent loan is directly proportional✓ to the value of the future profits contained in a block of business✓✓… …rather than current assets or collateral ✓… …with repayment of the loan to the insurer being contingent on those future profits✓✓. The contingent loan may have certain conditions attached to it✓, such as minimum profit levels or a maximum repayment period✓, that could affect the ultimate benefit to the insurer✓. The cedant may not need to reserve for the repayments within its supervisory returns given the contingent nature.✓✓ Insurer experiences an increase to its assets (inflow of cash) equal to the size of the loan ✓✓ …and no corresponding increase in liabilities…✓✓ …resulting in an improved solvency position of the insurer✓.

Answer 68

(i) The proposed product provides cover for cancer only and is therefore much less comprehensive that standard CI insurance. [1⁄2] The lower level of benefit for less serious cancers may also help to reduce the premium (although this depends on the exact claim definitions). [1⁄2] It is therefore likely to be aimed at customers that want some financial protection against getting the main critical illness they are afraid of (ie cancer), but cannot afford comprehensive CI cover. [1⁄2] Hence, they are likely to have low disposable incomes and may not be very financially sophisticated. [1⁄2] A low premium means that it will be more difficult to keep premiums competitive and cover fixed costs at the same time. [1⁄2] Hence, it will be important that the distribution channels used keep costs to a minimum and/or sell high volumes of business. [1⁄2] The insurer will consider its current distribution channels. However, in order to avoid taking business away from its existing CI products it may wish to consider a completely different approach. [1⁄2] The distribution method must target the correct type of customer. For example, to sell to someone who would otherwise buy (or already has) the insurer’s comprehensive CI product will likely lead to lower profits and possible customer dissatisfaction. [1⁄2] The product could be sold alongside a loan (eg a mortgage) and/or life cover; if the customer does not wish to take out comprehensive CI insurance, the cancer only cover could be offered. [1⁄2] Hence, tied agents (such as banks) could be used in some cases. [1⁄2] Direct marketing channels could also be appropriate, as this is a relatively simple product. [1⁄2] Mailshots or press advertising might be considered if they can target the market effectively (eg adverts in the right publications). [1⁄2] Similar considerations apply for telephone selling, but this may be too expensive to be cost effective. [1⁄2] The internet should be considered, and once set up, running costs should be relatively low. [1⁄2] In addition, the website could be adapted to make the product distinct from its other products (eg by having a different “brand”). [1⁄2] Face-to-face distribution channels, such as brokers or the insurer’s own salesforce, will have the advantage of being able to explain to customers the complexity of the dual benefit levels. [1⁄2] However, these channels may not be appropriate for the target market being considered, or to be cost-effective. [1⁄2]

Answer 69

All future cashflows from the existing business would be projected by the model... [1⁄2] ... allowing for cashflows arising from supervisory reserves ... [1⁄2] ... and from discretionary benefits, such as non-guaranteed surrender values. [1⁄2] Cashflow calculations need to allow for any interactions between assets and liabilities. [1⁄2] Cashflows arising from the exercise of policy options would need to be included. [1⁄2] of the model To calculate the value of the profit from the existing business: ● ● model points would need to be chosen to represent the existing business [1⁄2] project the future cashflows from each model point, allowing for the impact of supervisory reserves in order to assess the profit that can be transferred to shareholders in each future year [1⁄2] ● ● ● discount the expected profit at an appropriate risk discount rate [1⁄2] scale up the results of each model point and sum over all model points, to give the expected present value of the total profit from the existing business [1⁄2] combine with the current assessment of the free assets attributable to shareholders in order to get the total value of the profit. [1⁄2] Sensitivity of the calculation would be assessed by recalculating using different values for all the relevant assumptions required by the model (eg interest, mortality rates). [1⁄2] When making these variations, the parameters would be changed in a way that reflects the expected relationship between them. [1⁄2] The effect of departures from the base assumptions used in the model can then be described in the report to the company. [1⁄2]

Answer 70

F101 J2011; Q3 [14]

Answer 71

* Increase number of conditions/illnesses covered.✓✓ * Market the benefit more widely✓ (mailers to policyholders) – educate current policyholders about their benefit entitlements✓. * Lower underwriting measures at inception.✓✓ * Consider changing product risk measures✓ such as decreasing any waiting periods/pre-exclusion clause periods/survival periods✓✓. * Look at previous declines to see if claims practices were too strict and partial claims could be considered.✓✓ * Target a higher risk group of lives✓✓ (sell to older lives for example)✓. * Increase the value of the CI benefit.✓✓ * Include tiered benefits to offer less severe conditions.✓✓ * Offer reinstatement of benefit after claim.✓✓

Answer 72

NB strain occurs when the initial asset share (premiums received less initial expenses) is less than the sum of the supervisory reserves and the solvency capital requirement. [1⁄2] Any such strain has to be made good from the company’s free assets (ie those assets not earmarked for any particular purpose). [1⁄2] (a) CI insurance - For regular premium contracts the asset share is normally negative in the early years. [1⁄2] This is because there is a high level of expenses incurred at the start of the contract[1⁄2], in particular from commission, sales & marketing, underwriting and policy documentation; [1⁄2] and these costs are unlikely to exceed the amount of the first premium received. [1⁄2] The reserves will be at least zero because of the supervisory restrictions, plus any solvency capital that may be required. [1⁄2] Thus the value of the liabilities exceeds the value of the assets, and there is new business strain. [1⁄2] (b) Immediate needs LTCI New business strain often arises due to the valuation basis being stronger than the premium basis. [1⁄2] For this reason it is common to have NB strain, despite the large positive net cash inflow at time zero. [1⁄2] [Total 4]

Answer 73

ii. * Type of CI contracts✓ (e.g. fixed/index-linked, individual/group, tiered) ✓✓ * Number of contracts currently on the books ✓ * Duration in force ✓ * Premium frequency ✓ * Premium size ✓ * Sum assured ✓ * Original contract term ✓ * Conditions covered ✓ * Definition of conditions ✓ * Claims experience ✓ * Deferred and/or survival period(s) ✓✓ * Policy expenses ✓ * Underwriting information✓ – age, gender, exclusions,✓✓ etc.

Answer 74

**iv.** - The company will have a lower level of free assets ✓✓ - This would restrict its investment freedom ✓✓ - And also the limit the amount of business growth it can sustain ✓✓ - And the amount of profit that can be distributed ✓✓ - The cost of capital for the insurer will be higher ✓✓ – assuming reserves generate lower expected returns ✓ - Resulting in lower return on capital ✓ - May delay emergence of profit ✓ – and hence taxes ✓ **v.** Insurer’s actuary may have assessed the prudent reserving level is higher than the statutory minimum✓✓ o Based on the own risk and solvency assessment✓✓ (ORSA) o Significant uncertainty around LTC incidence rates✓ and length of time for which payments will need to be made✓ - Actuary has professional responsibility to ensure that reserves are adequate and not just meeting statutory level ✓✓ - External events/experience changes may result in solvency level being variable at different valuations ✓✓ o Being too close to the minimum requirement may risk it dipping below and possible regulatory intervention ✓✓ - Company specifics may mean that statutory approach deemed not appropriate✓ – onerous products✓ - Also statutory minimum may be determined on an outdated basis✓ or not allow for all the risks the insurer believes it is facing✓ – people living longer requiring care ✓ ## Footnote Part (iv), required candidates to realise that using additional capital towards the reserves in fact lowers the amount of free capital. It is only the amount of free capital remaining that can be used towards decisions such as changing investment strategy, new business etc.

Answer 75

A one-way analysis ignores correlations and interaction effects between variables [1/2], for example age and disease [1/2], age and smoker status [1/2] As a result, the model may underestimate or double count the effects of the variables. [1/2] A GLM produces estimates of the true value of relativities (√), by taking account of correlations and allowing investigation of any interactions between variables present in the model.(√)

Answer 76

- Tax rebates✓, e.g. lower tax on profits✓ - Pricing, product design, monitoring and evaluation support/advice ✓✓ (max of 2 examples) - Funding for the development and marketing of such products ✓✓ - Government assistance/guarantees if experience worse than expected ✓✓ - Favourable regulatory environment✓, e.g. lower capital requirements✓, limited underwriting restrictions✓

Answer 77

v. Employers usually obtain their group insurance policies from brokers.✓✓ The broker will be responsible for most of the communication✓ and data gathering✓. The insurer will therefore have limited opportunities✓ to: * Build a relationship with the employer.✓✓ * Influence the retention of the business.✓✓ * Influence the risk attitude and risk management of the employer.✓✓ vi. Employers that offer better benefits✓ are more likely to be able to recruit and retain better staff✓ than others, all else being equal. * Better staff satisfaction and productivity (also from better care).✓✓ * Provides assurance that all employees have a minimum level of private medical cover✓, ie can access doctors and medication when sick✓, and recover quicker✓ (where appropriate). * PMI insurer can offer corporate wellness days✓ and often have value-add reporting✓ and insights to employer✓. * There may be tax benefits for the company to arrange the insurance in this way.✓✓

Answer 78

Why persistency rates are an important component of product pricing Long-term contracts If a health and care insurance company pays a benefit upon surrender that is higher than asset share, the company will make a loss on that individual policy. [1⁄2] [1⁄2] The same will happen on policies that pay no surrender benefit where asset shares are negative ... ... which will normally be true at early policy durations when withdrawal rates also tend to be highest. [1⁄2] Similarly, paying a benefit which is less than asset share will give rise to a profit. [1⁄2] Persistency is also important for projecting future in-force volumes. higher withdrawal rates would mean that less profit would be expected from the portfolio later in the policy term, as fewer policies would still be in force. Short-term contracts Renewal rates are needed in order to assess the extent to which initial expenses can be spread over subsequent renewals. [1⁄2] The lower the renewal rate, the fewer renewals are expected from each policy sold, and so the higher the premium loading for initial expenses needs to be. [1⁄2] All types The impact on volume will affect the spreading of overhead expenses, and also of any fixed one-off expenses such as those for product development. [1⁄2] Poor withdrawal rates may also lead to reduced profits as a result of excessive levels of commission being paid, eg if indemnity commission is used. [1⁄2] This will be less of an issue if appropriate commission clawback arrangements are in place. [1⁄2] For example, [1⁄2] Withdrawals can be selective, taking out the healthy individuals from the portfolio and leaving the remaining policies subject to higher claim experience than was originally expected. [1⁄2] The pricing morbidity assumptions must take account of the expected effect of these selective withdrawals. [1⁄2] If persistency is incorrectly allowed for in the company’s pricing models, this would give a misleading indication of the profitability of the contract. This could also affect competitiveness and hence sales volumes.

Answer 79

Standalone CI – CI benefit is the main benefit✓✓ and payment on happening of insured event results in benefit ceasing✓✓. Rider CI – benefit is supplementary to death benefit✓✓ (or other main benefit) and payment of rider sum assured on happening of insured event does not remove the main benefit.✓✓

Answer 80

F101 NOV 2022; Q5 (ii)

Answer 81

Group policies will often have free cover limits✓✓ - certain level of benefits available without individual underwriting✓. Those looking for benefits above the limit provide medical information✓ or attend tests✓. Typically insurer will request that all insured members are actively at work on the day cover commences✓✓ or a moratorium is applied✓, where no claim is paid for short period after start of cover for new entrant✓. Limited insured information.✓✓ The following data are often not available: * Numbers of lives ✓ * Individual ages ✓ * Sex ✓ * Benefits ✓ *BINS* Often the insurer requests a deposit premium.✓✓ This is adjusted at the end of period when details are available.✓✓ Reduction in anti-selection effect as schemes get larger.✓✓ Premiums charged may be based on the experience of the group as a whole rather than as a result of individual medical underwriting.✓✓ This would depend on the size and credibility of the scheme.✓✓ For the largest schemes medical history may be disregarded completely.✓✓ Flex schemes have similar anti-selective characteristics as individual policies✓✓, so may underwrite increases in cover✓ or apply strict limits✓ **Need to consider** how to treat new-comers.✓✓ **Need to consider** influence of the intermediary.✓✓ Increased potential for anti selection✓ and limited supply of information✓ due to increased purchaser knowledge.✓ Dependants underwritten differently.✓✓ Level of underwriting may depend on assumed take-up rates.✓✓ Differences may be function of distribution methods.✓✓

Answer 82

(1) Income can be provided from the lump sum✓ via an annuity✓ when the individual cannot work as a result of his/her critical illness. * (2) The benefit can be used to repay a mortgage or other loan when the policyholder is diagnosed with a critical illness.✓✓ * (3) Medical costs can✓ be funded when the illness requires surgery or other expensive treatment.✓ * (4) A change of lifestyle✓ can be funded where necessary to improve the claimant’s health✓; for example, moving to a less stressful (and lower-paid) job following a heart attack✓. * (5) Other needs include recuperation✓ or rehabilitation treatment after illness✓, taxation planning✓, medical aids✓ (for example, the installation of specialist equipment in the home to enable the claimant to remain in his/her house✓). * (6) Critical illness cover can be used to buy out a partner’s stake in a partnership in the event that they are unable/unwilling to remain in the partnership.✓✓ * Benefit offers inflation protection against escalation of the costs in meeting, as long as these cost escalations remains below CPI+2%.✓✓

Answer 83

i. Regular income, payable for the rest of life - the amount of income will depend on the level of incapacity. [1⁄2] The benefit level may increase at a later date in accordance with specified conditions of increased incapacity, [1⁄2] ... eg either by testing using ADLs or by medical assessment of need. [1⁄2]

Answer 84

Reasons applicable to both (a) reduction in new business & (b) increase on lapses **Product design:** Product design may no longer meet customer needs [½] The list of diseases covered may no longer be suitable, or the definitions of the diseases may no longer be suitable (Company A might be using outdated and market-inconsistent definitions) [½] If the product only offers guaranteed premiums, policyholders who prefer reviewable premiums will go elsewhere, and vice versa [½] The product may not offer specific features which policyholders may prefer, e.g.: [½] (½ mark for any two examples below) [½] * Tiered benefits * Continuation / guaranteed insurability options * Children’s benefit * Total permanent disability (TPD) benefit * Terminal illness benefit Company A may offer Standalone CI but policyholders may want (and need) Accelerated CI (or vice versa) [½] **Product pricing:** Premium rates may have become uncompetitive in comparison with the market [½] This could be specific to certain age / gender / smoker status / sum assured size / occupational class groups (½mark for any two examples) [½] **Competition:** Losing business to competitors due to the increased level of competition, either due to: [½] (½ mark for any two examples below) [½] * More insurers writing CI business * The products offered by competitors are more attractive / suitable * Lower premium rates * Better reputation / brand image * Better customer services * Free gilts / financial incentives offered by its competitors The increased levels of competition could be due to the position in the underwriting cycle [½] If the individual CI market had become saturated, then even if there were no new competitors, competition could still have increased [½] There could have been reduced marketing for the product [½] **Customer services:** There could have been a deterioration in the insurer’s general customer services standard, such as: [½] (½ mark for any two examples below) [½] * Unprofessional / incompetent / rude customer services staff * Inefficient / slow customer services * Difficult and unsympathetic claims management process * Errors / inefficiencies / delays in claims handling / management...Read rest of paper for answer.

Answer 85

**Primary Care** refers to the work of health professionals who act as a first point of consultation for all patients within the HC system.✓✓ For example: A primary care physician✓ such as a GP or family doctor✓. A licensed independent practitioner such as a physio✓ A non-physician primary care provider (or mid-level provider)✓ such as a physician assistant or nurse practitioner✓. Primary care is often used as the term for the HC services that plays a role in the local community.✓✓ This level of care involves health promotion, disease prevention, diagnosis, treatment of common illnesses, and the management of chronic diseases.✓✓✓✓ **Secondary Care** Refers to the HC services provided by med specialists and other HPs who generally do not have first contact with patients.✓✓ For example, cardiologists, urologists and dermatologists.✓✓ It includes acute care and skilled attendance during childbirth, intensive care and medical imaging services.✓✓ It is sometimes used synonymously with “hospital care”.✓ However, many SC providers do not necessarily work in hospitals.✓ For example, psychiatrists, clinical psychologists and OTs.✓✓ Depending on the organization and policies of the NHS, patients may be required to see a primary care provider for a referral before they can access SC.✓✓ **Tertiary healthcare** involves specialised consultative HC✓, usually for in-patients✓ and on referral from a primary or secondary health professional✓, in a facility that has personnel and facilities for advanced medical investigation and treatment✓✓, such as a tertiary referral hospital✓. Examples are cancer management, neurosurgery, cardiac surgery, plastic surgery, treatment for severe burns, advance neonatology services, palliative and other complex medical and surgical interventions.✓✓✓✓

Answer 86

Direct marketing **Suitable because:** Mailshots, Telephone selling and Press / Internet advertising may be used to initiate the initial sale process [½] For standalone CI, comparison website may be used if the CI product features are relatively standard in the market [½] For budget Individual PMI, direct marketing will be cost efficient and [½] Potential customers should be able to get all the product features for simple Individual PMI product [½] It might be suitable for a fairly standard (i.e. consistent with other products available in the market) individual PMI [½] **May not be suitable because:** If product is complex, direct marketing may not provide all the salient details for the customer to fully understand [½] The tiered standalone CI product could be too complex for direct marketing [½] The underwriting process for CI product is likely to be too complex for the end-to-end sales process to be completed solely using direct marketing [½] In particular for applicants with specific needs, such as health issues / high sum assured [½] It is unlikely to be suitable for targeting employers who are the direct customers (so may not be suitable for group business) [½] For comprehensive Individual PMI, the product is complex and direct marketing may not provide all the salient details for the customer to fully understand [½] The detailed level of claims processing required by the product is difficult on direct marketing [½]

Answer 87

**Reputational risk…**✓✓ …some policyholders may feel they are not being treated fairly ✓ **Claims experience and anti-selection risk…** ✓✓ * …if premiums are adjusted then on average ABC’s premiums may be more expensive for some and cheaper for others relative to competitors ✓✓ …this may cause a shift in which policyholders stay and which lapse ✓✓… **risk that not as many high-risk lives leave as expected (business mix risk)** ✓✓ …which will mean a higher claims experience than expected✓…which may lead to losses and the need for a higher premium increase.✓✓ **Data risk…** ✓ …it may be harder to price the change in experience with the new factor introduced.✓✓ *(no industry data; are using claims data with limited credibility, etc.)* **risk of underpricing and losses occurring** ✓✓ **risk of mispricing** ✓ and driving volume of new business sales down.✓ *(break this down into if adjustment is too high vs too low)* **Reinsurance…** ✓ …reinsurers may not adjust premiums until enough experience has emerged that indicates a lower risk pool.✓✓ Need to monitor how **competitors** respond and the impact on business mix…✓✓ Risk that **regulators** may not approve new rating factor.✓✓ May be **no additional value** from new rating factor.✓✓ **Additional costs**associated with adding new premium factor✓...system changes, updating policy documents etc.✓✓ ## Footnote Some candidates spoke more about considerations to allow for as opposed to the risks. Candidates also needed to indicate clearly that risks arise where the experience is different to what was expected or allowed for.

Answer 88

* “1-in-200” year event represents an extreme event✓✓ that has a significant impact on the claims✓ of the insurer… * …forms part of PXA’s stress testing✓ * can be used to determine if PXA holds sufficient reserves to survive an extreme insurance loss event✓✓… * …which forms part of risk management✓ and sensitivity testing process✓✓ * It may be used as a guideline for regulatory reserve requirements✓✓… * …which may be used to set the minimum capital threshold under regulatory reporting requirements✓✓.

Answer 89

Benefits typically available on a PMI plan include: - Hospital costs ✓ - In patient costs✓ such as accommodation/private room✓✓, nursing care✓, operating theatre✓, diagnostic procedures✓, surgical dressings✓, drugs✓ - In-patient physiotherapy ✓ - Day patient costs ✓ - Accommodation/private room for parent accompanying a child ✓✓ - Specialist fees ✓ - Surgeons'✓ and anaesthetists' fees ✓ for in-patient or day-care ✓ - Physicians' fees ✓ - Outpatient fees/costs✓ such as specialist consultations✓, diagnostic tests ✓ (radiology, pathology)✓✓, physiotherapy ✓ - Radio/chemotherapy/scans ✓✓ - Additional benefits✓ such as private ambulance✓, recuperative care ✓ - Cash for treatment in state system ✓ - Benefits may be offered on an indemnity basis✓ or there may be limits to payments✓ or excesses✓ - Applies only to acute conditions ✓ ## Footnote *The question asked for a description of the benefits typically available under a UK PMI plan, not for an explanation of the purpose of PMI, which some candidates gave. Many candidates failed to record enough points to gain many marks on this question.*

Answer 90

Policyholder offered immediate cover.✓✓ No formal UW is carried out at the point of acceptance✓✓, but past medical history is examined at the time of claim✓✓. The applicant can claim for any condition✓ other than those pre-existing in a defined period before acceptance✓✓, often 5 years✓. This exclusion is waived after a period of time✓✓, usually 2 or 3 years✓, if the PH receives no further treatment for the condition✓. If the PH does receive treatment for pre-existing conditions, then the moratorium period is restarted.✓✓

Answer 91

Select products for their clients from all or most of those available in on the market.✓✓ * Must act independently of any particular insurace company✓✓ (although they can be owned by one)✓. * Their aim is to find the contract that best meets situation of their clients.✓✓ * They may be remunerated via commission payments (by the companies whose products they sell) or they may alternatively receive a fee from their clients.✓✓ ii) * Insurance distributors can gain marketing access to all the individual members of a particular group, such as the employees of a particular company.✓✓ * The distributor aims to attract those who have not made their own insurance provision for healthcare needs and do not have adequate employer-paid cover.✓✓

Answer 92

**Risk XL**✓ o could be appropriate if the long COVID-19 claims are proving to be higher individual claim amounts✓✓… o for example, long duration stays in ICU or require specialist equipment✓… o However, not appropriate for many recurring hospital visit or for claim events increasing the total volume of claims across the PMI book.✓ **Aggregate XL**✓ o would be better suited for higher volumes of claims than expected, as result of pandemic and long COVID✓✓. o The claims experience above the attachment point would be recoverable from the reinsurer and the insurer could take out many cover levels if concerned that claims could spike again in the future✓✓ (future waves for example)✓ o The lower the attachment point the more expensive the cover would be✓ o Less useful when the claims are evenly spread over time, as it provides protection only for the portion of the losses that exceed the attachment point during the 12-month period✓✓. **Catastrophe XL**✓ o Unlikely to be appropriate given pandemic cover not usually included in catastrophe XL✓✓… o …and difficult to define a single event in a pandemic with appropriate claim event window✓✓

Answer 93

UK SEP 2020; Q7 (iii)

Answer 94

* Calculate the mean and standard deviation of the development factors✓✓ * …create an acceptable range / confidence interval✓✓ * …for example using the mean plus or minus two standard deviations✓✓ * …exclude from calculations any development factors that fall outside the range✓✓

Answer 95

Random fluctuation – unlikely ✓✓ Greater utilisation of benefits ✓ – consumer/provider behaviour/supply increases ✓✓ Increases lower than claims inflation ✓✓ – marketability/grow market share✓ - Medical inflation may be persistently higher than expected✓ – new diseases, technological advances, etc.✓✓ - Growth in business✓ – greater new business strain.✓✓ - Investment returns lower than expected.✓✓ - Expenses higher than expected.✓✓ - Changes in underlying demographics ✓✓, e.g. ageing population; incidence of chronic conditions; selective lapsing ✓✓ (for any example) - Errors in pricing basis✓✓ – claims incidence/frequency being under-estimated.✓✓ - There may be increasing levels of anti-selection✓✓ – policy wording not adequate.✓ - Fraud, wastage or other inefficiencies resulting in losses.✓✓ - Regulatory changes on minima/maxima, reserving requirements, etc.✓✓ - Healthy policyholders lapsing their policies in favour of competitor offerings.✓✓ - If the solvency capital levels have been historically very high, a conscious decision by management may be to gradually reduce this to a more capital efficient level✓✓ by utilising the capital to grow the business or pursue other more lucrative opportunities.✓✓

Answer 96

Mutuality – each risk/individual is evaluated on its own risk characteristics✓ and charged a premium commensurate with the level of risk posed✓. Solidarity – individual risks aren’t evaluated for premium purposes✓– premiums depend on other factors such as ability to pay✓, and cover is granted based on need✓. The group’s risks as a whole are evaluated to establish the overall premium required✓✓. Also known as community rating✓. ## Footnote *Part ii was bookwork, and generally poorly answered. In pricing, the principle of mutuality refers to pricing for the individual risk posed, whereas pricing on solidarity principles means that the price an individual pays is not directly linked to the level of risk they pose*

Answer 97

Aggregated capital requirement = root of [matrix sum(Corr(ij) x Cap(i) x Cap(j)] = 159.11 Cap(i) = capital requirement under risk i Cap(j) = capital requirement under risk j Corr(ij) = correlation between risks i and j. (iii) The sum is 175 which is greater since the risks are not 100% correlated and hence there is benefit from diversification.

Answer 98

v. o Employers usually obtain their group insurance policies from brokers✓✓. The broker will be responsible for most of the communication✓ and data gathering✓. The insurer will therefore have limited opportunities✓ to o Build a relationship with the employer✓ o Influence the retention of the business✓ o Influence the risk attitude✓ and risk management✓ of the employer vi. Employers that offer better benefits are more likely to be able to recruit and retain better staff than others, all else being equal.✓✓ * Better staff satisfaction✓ and productivity✓ (also from better care) * Provides assurance that all employees have a minimum level of private medical cover✓, ie can access doctors and medication when sick✓, and recover quicker✓ (where appropriate) * PMI insurer can offer corporate wellness days✓ and often have value-add reporting and insights to employer✓. * There may be tax benefits for the company to arrange the insurance in this way.✓✓

Answer 99

Hospital networks✓ should be to evaluated in the areas in which large employers are based✓, ie need to have hospitals within a reasonable radius from the majority of employee base as part of the network✓. * Specialist networks✓ should be established/re-evaluated in the medical areas that the employees are most at risk of needing treatment from. o (This would also apply to Family Practioners (“GPs”) as well as pharmacy networks.)✓✓ * Wellness days✓ (eg for preventative health screenings)✓ should rather take place at the workplace (employer)✓ than at the wellness day events target for individual policyholders✓. * The wellness communications✓ should be tailored to the specific characteristics of the employer✓ (eg mining workers and call centre agents would have different health challenges)✓ * Could recruit a doctor/nurse to be based at the employers’ location✓ to deal with employees’ medical problems✓ as soon as they arise, or a tele-health solution✓ (eg virtual 24/7 nursing service). * Should try and extend managed care interventions to be put into practice for the employers themselves✓, eg minimum standards of health and safely within the workplace✓.

Answer 100

* Protect company from anti-selection.✓✓ * And in particular protect company from seriously impaired lives where it is impossible to assess risk accurately.✓✓ AS can lead to both higher than expected frequency of claim and average cost of claim.✓✓ * Identify substandard lives to offer special terms.✓✓ A company may however aim to accept most lives at standard premium rates✓. * Identify most suitable approach for substandard lives.✓✓ * Identify most suitable premium for substandard lives.✓✓ * Accurate risk classification to ensure fair rating.✓✓ * Try to ensure experience does not deviate from that assumed in pricing of contracts.✓✓

Answer 101

UK SEP 2020; Q5 (ii)

Answer 102

ii. * Symmetrical about the x-axis✓ * Average residual of zero✓ * Are fairly consistent✓ across width of the fitted values✓ ii. - Check which variables are statistically significant✓ against a computer generated p-value threshold✓ - Calculate AIC values, F tests, Chi-Squared✓✓✓, or some other comparative measure✓ - Plot odds ratios✓, those with confidence intervals above 1 are statistically significant drivers.✓ - Check which variables add to explanatory power of model with/without other variables present - effect on the statistical measure chosen, or otherwise stated: Change in nested model deviance is significant.✓✓

Answer 103

(i) **Advantages** There is the potential of increase in sales for smaller sum assured size policies, because of the simpler sales process [½] If competitors are not currently offering this, it could be a unique selling point / product feature [½] There could be significant savings in underwriting costs [½] A more efficient sales process is likely to be welcomed by the intermediaries and policyholders [½] The potential increase in sales could also improve economies of scales, as there would be larger volume of business to spread overhead costs [½] This may in turn improve the profitability of the company [½] As an alternative to increased profits, lower expenses could result in lower premiums, which might further increase new business volumes and hence profits [½] Improved customer experience may help improve persistency experience [½] The innovation may also enhance the company’s reputation / brand image in the market, which may help the sales of the company’s other products [½] If the level of “Free Cover Limit” has been chosen appropriately, the additional underwriting risk could be minimal [½] It might be possible for the insurer to choose “Free Cover Limits” that are appropriate because it has experience from its group business, and it may be straightforward to apply the changes on systems and literature because of this [½] There could be faster processing of claims for smaller benefit policies [½] (ii) **Disadvantages** There could be anti-selection risk [½] in particular that the level of “Free Cover Limit” is set too high, or if other insurers are not offering this [½] If the company tries to allow for anti-selection risk in pricing, this could push the premium rates upwards [½] leading to healthier lives seeking their cover with other insurers and further exacerbates the anti-selection risk [½] The lack of underwriting could lead to inadequate premium rates being charged [½] The deterioration in morbidity experience could lead to increased reserving and capital requirements, leading to: [½] (½ mark for any two examples below) [½] * Reduction in profit * Intervention from regulators * Damage to the company’s reputation / brand image which could cause further adverse effects on future sales. On the other hand, if the level of “Free Cover Limit” is set too low it may not have the desired impact on increasing new business sales [½] Policyholders might deliberately ‘play the system’ and select benefits just below the “Free Cover Limit” [½] The business profile may change as a result as this could lead to higher proportion of smaller size policies [½] But the overhead expenses remain the same, which means more policies would need to be written to cover the relatively lower contributions towards fixed expenses by the smaller size policies [½] There could be issues in finding suitable reinsurance cover [½] Renegotiate with reinsurer for revised terms may result in more expensive reinsurance premium rates [½] There could be increased new business strain if the new product is popular [½] If the new feature does not increase sales sufficiently, development / project costs may not be recouped [½] If group “Free Cover Limits” are not appropriate for individual business (or if the group “Free Cover Limits” are inappropriate), then the insurer is unlikely to achieve a satisfactory result [½] Depending on the needs of customers, this approach might bring the insurer in-line with competitors which could lead to it losing its unique selling point (USP), or out-of-line with competitions which could lead to it losing sales because the concept of “Free Cover Limits” is not accepted by the market [½] [Marks available 14, maximum 8] One key action is to ensure that the chosen “Free Cover Limit” is at the appropriate level. [½] It should be at a level that will attach more new business, but also serves the purpose of mitigating the risk of the company being selected against. [½] Perform analysis of the average size of policies typically written by the company [½] and compare that with the rest of the market. [½] The company may also consider offering different levels of “FCL” to different risk groups, such as age bands and occupational classes. [½] The company may consider a more tiered system, where there is a “FCL” below which no underwriting is done, followed by another (higher) “FCL” below which a small amount is done. [½] This would reduce the impact of setting the (single) “FCL” at the wrong level or having an ‘all-or-nothing’ system. [½] The company may improve the product features to address potential selection risks, [½] such as: (½ mark for any two examples below) longer waiting period, extend the list of exclusions for pre-existing conditions, remove other options to reduce risk generally. Consider applying indexation to the “Free Cover Limit” to ensure it remain appropriate over time [½] Pricing and Underwriting risks: Consider the potential impact on morbidity experience and update the pricing assumptions according. [½] Factor any saving on underwriting costs in pricing. [½] Consider the potential implications on business profile, in particular the split between smaller size policies and larger policies [½] and derivation of the per policy maintenance expenses. [½] Consider whether guaranteed premium period should be reduced to allow the company to review premiums earlier. [½] Re-design the proposal form to capture additional information. [½] Target marketing to insure good risks. [½] Reinsurance: Seek reinsurance assistance in setting the appropriate level of “Free Cover Limit” and managing pricing / underwriting risks [½] Negotiate with reinsurer to incorporate the changes in reinsurance treaties / arrangements [½] Other: Ensure that sales literature is clear, particularly around the customer needs being met by the cover, so ensuring that customers choose their benefit level based on need, rather than the “Free Cover Limit” [½] The company could enhance risk management, specifically for risks with benefits below the “Free Cover Limit”, e.g. by increasing claims underwriting, and/or [½] generally (e.g. through good management control systems) for all risks in order to reduce reserving and capital requirements [½] [Marks available 10½, maximum 5]

Answer 104

Given that there are multiple MCO’s tendering, a good value proposition✓✓ is required to win the business. o A stronger value proposition, may also allow you to tender successfully at a higher price✓ . - Your MCO is established, so may have a good reputation✓, plus significant experience in the delivery of managed care services in the industry✓ – which could be highlighted in the proposal✓ – may give some advantage over competitors✓ - Also, good industry networks and relationships may assist in being awarded the contract.✓✓ - Price is an important consideration for insurers when evaluating alternative options – hence aim to be competitive in the tender.✓✓ o May tender low to win the business✓ (if can be subsidised by other business)✓. o With possibility of increasing cost later✓ – perhaps on a performance-based basis✓ o Or if value offering significant✓ and insurer’s loyalty ensured down the line - However, price is not the only consideration✓. The decrease in healthcare costs & increase in quality of care (and management of overall risk) are key considerations for managed care interventions.✓✓ - Provide ROI projections to insurer based on past experience with other insurers, adjusted for the profile of the insurer’s book✓✓ – o this can be per managed care intervention and in aggregate✓✓ o Project positive cost impact of increase in quality on profile of lives downstream✓✓ - Offer a range of interventions✓ (as outline above) – the more comprehensive✓, the more attractive the tender will be o The more sophisticated✓✓ the interventions/services and the employing of cutting-edge technology✓ can enhance the value that can be derived – outline these - Offer additional value-add services✓ (possibly free of charge?)✓ o Dynamic contracting✓; real-time monitoring✓ and reporting on key metrics✓, standardised reports✓, etc. tailored to the insurer’s needs and requirements✓ o Add personal touch✓; dedicated relationship manager(s)✓ and other key resources✓ to the contract. - With the tender itself – submit on-time✓✓; professionally type-set✓, bound✓, in-colour✓ – creating a good impression✓; - Tailored to the needs and requirements of the insurer.✓✓

Answer 105

* The long term care product can be used to cover, or help to cover, the cost of care in old age✓ when individuals are no longer able to look after themselves✓ * This might be home based care✓ * Or care in a nursing✓ or residential home✓ * To pay for the costs of extra equipment✓ * Alterations to the insured’s home to assist with their incapacity✓✓

Answer 106

Solution 12.13 (ii) Unit-linked stand-alone critical illness policy Income: premiums less bid value of units bought by premiums (ie premiums less cost of allocation), monetary administration charges, charges to pay for cost of benefits, fund management charges, interest (earned during year on non-unit cashflows). Outgo: expenses, commission, expected cost of paying claims in excess of unit fund value at date of claim, tax. For both types of policy, expenses would be separately identified according to whether they were initial, renewal or claim expenses, and commission as to whether it was initial or renewal.

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