Lots of April 2005 Questions

1. The solution says:
Offering incentives to employers who contribute to savings products to employees. Please provide examples of incentives.

 

2. The solution says


1) It may want the expected profit after the alteration to equal the expected amount had the policy originally been written on its altered terms. How is this possible?

 

3. The solution says EPV(Prems)= 376.62 a(due 50:10) + D60/D[50]*(0.7*376.62*a due (60)+0.3*(376*a due(60)+642* a due(60))... I don't agree with using the 376*0.3 in the second part of the formula because the people who exercise will only pay the 642. Please explain.

 

4. The solution says:

Analysis of persistency will help management decide whether surrenders/termination scales need review and any customer retention activities need to be reviewed. Is this because if surrender values are high then persistency will be low and vice versa? Please clarify

 

5. The solution says:

1)The impact of a decrease in the value of assets on the valuation basis depends on the mix of assets and how much of the fall in assets is absorbed by the free assets. Please clarify

2) If the decrease in value of assets is primarily in the value of equity investments then this would be absorbed by a reduction in the investment reserve and would have little impact on the liabilities. Please clarify

 

6. The solution says:
Selection

a) For example, if they do not expect to be paying significant levels of future premium then they might be more likely to opt for a version b product. Please clarify.

b) If they expect the term of investment of each premium to be relatively short, then they more likely to opt for version a. Please clarify

Market/Competition

a) The company needs to evaluate the optimal pricing strategy by taking into account the interaction between margin and volumes. Please clarify.

 

6. The solution says...please clarify..
Expenses/Charges

a) Fixed charges might be more attractive to the market, but this would increase the risk to the insurance company therefore is likely also to increase the capital requirement.

b) For example, under version a it might prefer to offer fund based renewal commission but premium based commission under version b as this better matches the charging structure.

Sensitivity

a) The company should test the sensitivity of profit to variations in future experience. For example, version a will be more sensitive to future investment returns and if x<y then version a will also be more sensitive to early withdrawal experience.

b) Since both options will result in a cross subsidy from large to small policies the company should consider whether to impose a minimum case size.

 

2.1 how is it possible, just charge the premium form that profit to emerge.
How would you do it. Probably explicitly adjust asset share by the expected profit and equate to realistic value of future benefits. might be other ways.

 

3. if they take the option, they don't stop paying the first premium. after the option has been taken they will have 2 policies with 2 premiums. There's an example in the Core Reading very similar to this.

 

If charges are reviewable, then even if actual expenses increase in the future, the insurer can just increase the charges and pass the increased expenses to the customer. However, if the charges are fixed, then the risk of increased expenses falls on the insurer. And so expense risk is higher and the capital requirement is increased.

It's saying that the charging structure should be matched with the commission structure. So if charges are based on fund value and charged annually, so should commission. And if charges are based on premiums, then so should commission. Just imagine if it was the other way round. Say the insurer goes with (a) but offers a premium based commission. Now imagine the employer pays monthly premiums. Then the insurer will receive charges (income) only once a year but have to pay commissions (outgo) every month!

Version (a) is more sensitive to future investment returns because it is based on a % of the fund value. If the investment returns are poor, then fund value is lower and so the charges received are lower.

If x < y, version (a) is more sensitive to early withdrawals. There are initial expenses to setting up the policy. Version (b) is going to recoup those initial expenses immediately because otherwise it is not a profitable policy since the insurer cannot make any further charges. Therefore, it is not as sensitive to early withdrawals as it has already recouped the initial expenses. For version (a), the initial charges probably won't cover the initial expenses, so it relies on further charges to cover the initial expenses. If the policy lapses, then it won't receive anymore charges and won't be able to recoup initial expenses.

As both options involves charges that are based on the SIZE of the contract (either fund value or premium), there will be cross subsidy as larger contracts will be paying more charges (and hence contributing more to expenses). If the insurer does not impose a minimum case size (i.e. contract size), it runs the risk of having small contracts which can't even cover overheads.

 

Thanks a lot. Makes sense to me now.