1) How does part of the solution for question 6(i) higlighted in "red" relates to the mortality assumption? Can someone please explain There is the risk that the fixed percentages may become out of date and not adequately reflect the mortality of the business written. There is a risk that the table may become out of date and unrepresentative of the business that the company writes. There is a risk that the mix of business changes in the future, by Sex Age Smoker/Non Smoker Class of Life The fixed percentage will have meant some cross subsidies are likely to have existed in the past. .......... 2) I don't understand parts of the highlighted in "red" for 6(ii) - Page 14. ......................... It is possible that the customers for the new contract come from a different socio-economic group to the existing contract type. The possibility of no underwriting would also make the new population significantly different to the existing population. Is the existing population the lives holding term assurance policies? The current model may therefore be inappropriate and the current parameters are likely to be inappropriate By moving into a new market and, therefore, possibly leading to a significant increase in the number of customers, the random fluctuation risk could be reduced. The increase in cutsomers would only relate to the whole of life policy so how would the random fluctuation risk reduce? 3) I don't understand part of the solution 6(iii) highlighted in "red". - Page 15 Advantages The outsourcing company may have better customer service standards than those currently within the life company, leading to potential better retention of policies. Entering into the arrangement will give greater certainty to the costs that the company will incur over the guaranteed period.This will enable greater confidence in pricing and reserving. The fee may result in lower fixed expenses. The outsourcer may have better IT systems than the company and thus improve servicing overheads.By putting the business on the same IT platform as the outsourcers other clients, the company is achieving a greater economy of scale.The costs of future industry wide changes can be shared with the other companies . Can you please explain the above in more detail? How is the company achieving greater economy of scale? Disadvantages The company is no longer directly in control of customer contact. As a result, the company will wish to agree the service standards that the outsourcer should apply to ensure that the company does not suffer from customer dissatisfaction and consequential brand damage. If underwriting processes are outsourced then the life company will suffer from a loss of control over those processes and may experience a fall in underwriting standards. The company is liable for the migration and development costs and risks inaccuracies and work not being completed on time.These costs will be crucial in the business case justifying the decision. The life company will have limited control over these costs, as a significant proportion will be incurred by the outsourcer. There will be an increased policy size risk due to having a fixed fee per policy. Can you please explain this? There may be limited control over the fees that will be charged at each renegotiation.If the rise is significant the company may have to move the business back in-house or to another outsourcer.The likelihood of this will depend on the existence of other outsource companies and the ease of migration. Being a comparatively small company the level of influence the life company will have over the outsourcer will be limited, especially when it comes to renegotiation of fees or service standards. Term assurance and whole of life are relatively straightforward contracts to administer and so it may be possible to move them quite easily. However, it would be better to agree some principles regarding the possible ^increase in fees in order to reduce the need to move the book again. Can you please explain this? There may be brand damage resulting from possible redundancies, as well as the costs associated with such redundancies. The company will need existing staff to make a success of the migration. Maintaining morale through the period of uncertainty will be a challenge. Many Thanks
