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Flashcards in Exams P2 Deck (29)
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1
Q

Market option pricing method for pricing guarantees

A

 Consider market prices for options that replicate the guarantee, for example European put options on interest rates, call options on bond prices, or swaption prices (for a swap to receive fixed and pay variable).
 Options terms (interest rate, duration) should reflect the annuity guarantees.
 If market prices are not available estimates can be provided by market participants.

2
Q

Stochastic simulation method of pricing guarantees

A

 Using a stochastic model of interest rates project interest rates (bond yields) to those ages where the option could be exercised.
 Assess the probability of interest rates falling below the guaranteed rate, and the average difference, and apply to projected fund values to estimate the potential cost.
 Calculate a discounted value of the potential cost.

3
Q

why would an insurer request that 100% of a particular risk is reinsured?

A
  • may consider the price offered to be very good value for money.
  • might not have sufficient experience of selling this product.
  • may need solvency relief, which could be achieved by passing on all of the risk to the reinsurer.
  • may not see this as a core part of their business, and thus be happy for the reinsurer to take on all of this risk and manage the portfolio.
  • may have no particular risk appetite for that particular market segment.
  • may want to reduce the volatility of its claims experience.
4
Q

why would a reinsurer agree to reinsure 100% of a particular risk from an insurer

A

 If the reinsurer has priced correctly the quoted price should result in the required level of profit to the reinsurer.
 Expenses will probably be spread over a larger premium than initially expected, so it should generate even better profit than originally priced.
 The reinsurer may agree to reinsure 100% of the risk to maintain a good relationship with the insurer if the remainder of the insurers reinsurance programme is profitable to the reinsurer.

5
Q

why would a reinsurer decline reinsuring 100% of a particular risk from an insurer

A
  • insurer has no interest in the experience and management of the portfolio if 100% of the risk is reinsured.
  • This could lead to the insurer being less vigilant on underwriting and claims decisions.
  • The reinsurer may specify strict underwriting and claims assessment requirements as part of this agreement.
  • This is especially true if the reinsurer cannot re-price the business at a later point in time.
  • The request to reinsure 100% of the business may lead the reinsurer to re-evaluate its pricing (the reinsurer may have been too aggressive in the pricing initially).
6
Q

what are the additional risks taken on through reinsurance

A

Risks taken on:
Counterparty risk / Credit risk – The reinsurer may be unable to pay the claims as they arise.
Legal risk – A reinsurance contract will need to be entered into, and no contract is completely clear and unambiguous.
Systems risk – insurer will need to pay over the reinsurance premium (which have to be calculated) and ensure that the reinsurer is informed of every life covered. This will need to be done electronically and thus systems risks arise.
Operational risk – insurer will remain responsible for the underwriting and claims. Failure to perform these processes as per the reinsurance contract would introduce operational risks.

7
Q

why would making a policy paid up be attractive to phs

A

Policyholders’ circumstances could change eg redundancy, making future premiums unaffordable
Policyholders’ needs may change, making contract unsuitable eg if they have repaid their interest-only mortgage and hence policyholders would find the flexibility to make policy PUP attractive.
Policyholders may prefer continuation of contract in PUP form so as to still have life cover, compared to the alternative of surrendering the contract.

8
Q

list ways in which a unit linked product can be restructured to reduce the capital strain

A

Reduce the premium allocation rate.
The company could employ actuarial funding or use negative non-unit reserves.
The maximum commission upfront could be reduced .
The company could introduce a bid offer spread charge.
The investment portfolio guarantees could be removed.

9
Q

Features of the gross premium valuation method:

A

 an explicit allowance is made for expenses
 an explicit allowance can be made for vested and expected future bonuses
 the future premiums valued are the actual (“office”) premiums expected
 any differences between the pricing and valuation bases will immediately be taken as profit or loss
 a prudent basis should defer the release of profit over the lifetime of the policy
 reserves may initially be negative for non-linked business, partly due to initial expenses and partly due to capitalising the expected future profit
 the reserves tend to be quite sensitive to changes in basis

10
Q

what is the purpose of a minimum solvency margin. what is the relationship between the reserves and the margin

A

This solvency margin provides an additional level of protection to policyholders (protection against insolvency, protection against systemic risk, to maintain market confidence, to reduce the risk of reserves being insufficient, to act as an early warning system for the supervisor) against future experience being worse than reserved for under the supervisory reserving basis.
The required margins in the reserve calculation and solvency margin calculation should reflect the risk of the insurer.
There is a direct relationship between the level of prudence in the supervisory reserves and a suitable level for the required solvency margin.
The level of prudence in the reserves (i.e. prescribed margins) implies that the minimum solvency margin required as protection for policyholders should be lower.

11
Q

The distribution channel may impact on the product Expected mortality and withdrawal experience through the following

A

 financial sophistication of the target market
 who initiated the sale
 extent to which distribution channel explains product features accurately
 level of underwriting
 demographic characteristics

12
Q

The distribution channel may impact on the product Expected expense experience through the following:

A

Sales volumes will be affected by how well the distribution channel does which will impact on expense experience and number of policies that can cover overhead expenses.
Expenses of the different channels to the company may also be different i.e. extent of admin required to get policies on the books.

13
Q

what are the aims of the government in providing healthcare and welfare.

A
  • to protect the health of the nation
  • to subsidise the poor
  • to balance the budget
  • to follow social and political promises
14
Q

list the risks associated with the HC policies from the insurer’s perspective

A
  • Anti-selection risk
  • Lapse risk
  • Expense risk and expense inflation risk
  • Data risk
  • Claim risk
  • Severity risk
  • Longevity risk
  • Investment risk
  • Environment risk
  • Volumes of new business
  • Competitive risk
  • Reputational risk
  • Policy wording
  • If it is an indemnity benefit
  • Demographic changes
  • Any guarantees
15
Q

• Anti-selection risk

A

– risk of policy being purchased only by those likely to claim

16
Q

• Lapse risk

A

– risk of higher than expected number of lapses and risk of selective lapsation

17
Q

• Expense risk and expense inflation risk

A

– risk of policy expenses exceeding premium provision.

18
Q

• Investment risk

A

– risk of investment performance being lower than provided for in pricing.

19
Q

• Environment risk .

A

– risk of changes in legislation, economic cycle affecting viability of the product

20
Q

• Competitive risk

A

– risk of competitors undercutting product or creating more marketable product.

21
Q

• Policy wording

A

– e.g. claim triggers may not be clearly enough specified or there may be some ambiguity.

22
Q

• Data risk

A

– new product thus will need to rely on external sources of data.

23
Q

risk re guarantees

A

• Any guarantees (e.g. premium increase guarantees) will increase risk.

24
Q

risk re indemnity benefit

A

– exposed to increases in the cost of care.

25
Q

• Volumes of new business

A

– new product thus uncertain. Insurers have had difficulty selling volumes of long term care products (relatively expensive).

26
Q

• Severity risk

A

– risk of average claim exceeding expected value.

27
Q

• Claim risk

A

– risk of greater proportion of policies being eligible to claim than anticipated.

28
Q

• Reputational risk

A

– e.g. differences in interpretation of claim triggers, mis- selling of product by brokers, inflation eroding value of benefit.

29
Q

• Longevity risk

A

– risk of claimants living for longer than anticipated.