SP2 Mock exam

[Helloall]

6iii) I cant really understand the answer to this question. In particular -

"
If the quality of the underwriting is improved by the introduction of telephone underwriting then the insurer’s mortality experience will improve ...
... leading to lower premiums, higher sales, and increased profits.
"
I dont understand the comment if the "quality of underwriting is improved" you get better "mortality experience"?

Difficulty i think stems from the word "improve", what does that exactly mean?

If you "strengthen" underwriting you get better mortality experience (e.g. you reject more claims of high mortality, hence you get better mortality - lower). However, why would that increase sales?

If you "improve" underwriting, this leads to a better quantification of the policyholders risk. Meaning we charge more appropriately for each policyholder and hence reduce our risk and our pricing margin. This can therefore mean we can lower our premiums, receive higher sales and ultimately increase profits. But how does this improve mortality experience, it is the exact same as before we just charge differently?

 

[Helloall]

I also have a question regarding the payout of profits.

One of the risks flagged in 7iii) for the with profit contract is that due to competition and PRE we are at risk of paying out more than we can afford.

Why is this not a risk for revalorisation and unit linked contracts?

Couldnt we theoretically payout more than expected for these policies due to competitive risks? (I agree we wouldnt for PRE, as revalorisation the bonuses are paid out using a formula approach and the policyholders should know this and the unit linked contract the investment return is a policyholder risk).

 

[Mark Willder]

6iii) I cant really understand the answer to this question. In particular -

"
If the quality of the underwriting is improved by the introduction of telephone underwriting then the insurer’s mortality experience will improve ...
... leading to lower premiums, higher sales, and increased profits.
"
I dont understand the comment if the "quality of underwriting is improved" you get better "mortality experience"?

Difficulty i think stems from the word "improve", what does that exactly mean?

If you "strengthen" underwriting you get better mortality experience (e.g. you reject more claims of high mortality, hence you get better mortality - lower). However, why would that increase sales?

If you "improve" underwriting, this leads to a better quantification of the policyholders risk. Meaning we charge more appropriately for each policyholder and hence reduce our risk and our pricing margin. This can therefore mean we can lower our premiums, receive higher sales and ultimately increase profits. But how does this improve mortality experience, it is the exact same as before we just charge differently?

Hi

Your comments on what it means to improve underwriting all sound correct. So we just need to see how this improves sales for the insurer.

I think the key step is to consider the standard premium rate (ie the premium paid by lives that pass underwriting without special terms being imposed). If the underwriting is poor then we will accept unhealthy lives at standard rates. This means that we have poor experience on our standard book of business. Hence we need to increase premiums (to avoid losses). This will discourage sales to the healthy lives (who are the ones we want, and generally make up the majority of applicants) and sales fall.

So improving the underwriting should allow us to offer more attractive premiums to healthy lives and will increase sales. We may see a drop in sales to the less healthy lives (who are now charged higher premiums), but as these people are still charged a fair premium for their level of risk then it's quite likely that they will buy anyway (unless competitors are willing to write this business on loss making terms).

Best wishes

Mark

 

[Mark Willder]

I also have a question regarding the payout of profits.

One of the risks flagged in 7iii) for the with profit contract is that due to competition and PRE we are at risk of paying out more than we can afford.

Why is this not a risk for revalorisation and unit linked contracts?

Couldnt we theoretically payout more than expected for these policies due to competitive risks? (I agree we wouldnt for PRE, as revalorisation the bonuses are paid out using a formula approach and the policyholders should know this and the unit linked contract the investment return is a policyholder risk).

Hi

I think you have answered your own question. Once unit-linked and revalorisation policies are written then the formula for calculating benefits is fixed, ie the unit fund (subject to any guarantees) for unit-linked and the published formula for revalorisation.

There is no such fixed formula for the additions to benefits approach and so the insurer might choose to pay more for competitive reasons.

Best wishes

Mark