Possible variations on a contract

Nature: set up limitations on the policyholders who can take out the policy and the condition or amount of paying out the claim / surrender value.

• Exclusion clause
• Initial underwriting
• Set up excess, maximum payout
• age limitation
• waiting period
• Apply age-related management charge to reduce mortality risk.
• Reduce initial allocation percentage
• Set minimum single premium to avoid large volume of small policies, thereby reducing risk of not meeting fixed and/or per-policy expenses.
• Increase surrender penalty applied to deter withdrawals

However, each of these may make the product less marketable.

• Coverage overseas
• Replacement vehicle
• Multiple drivers
• Non-claim discount
• Road side assistance
• Pay as you drive
• Gap insurance (GAP insurance is the difference between the actual cash value of a vehicle and the balance still owed on the financing (car loan, lease, etc.))

• Weaken assumptions used in pricing basis
  • Particularly with regard to claim inception and termination rates.
  • But, increased risk of pricing assumptions not being borne out in practice, which will result in future losses.
• Reduce profitability
  • Expectation of increased volumes offsetting reduced profit per case.
  • But, elasticity of demand may not be accurately understood and, thus, increases in volume may not be as expected.
  • Also, need to consider competitor response to lowering premiums, which may limit any expected increase in competitiveness.
• Reduce underwriting costs
  Saving can be passed on to policyholders in the form of lower premiums. But, claims experience is likely to worsen, which will negate any reduction in premiums.
• Implement more stringent underwriting procedures
  • Should lead to lower claims inception rate and, thus, lower premiums.
  • But, will increase decline rates and lengthen sales processes.
  • Also, increased cost of underwriting may outweigh any premium reduction as a result of better risk targeting.
• Reduce claims outgo
  • Apply limit on proportion of income protected, maximum age or maximum payment period.
  • Increase exclusions applied and/or introduce longer deferred period.
  • Reduce escalation of claims in payment
  • These actions may reduce the marketability of the product, so that the reduction in premium rates achieved does not result in increased volumes of business sold.
• Implement more stringent claims control processes
  • Decline more claims.
  • Review existing claims on a more regular basis.
  • Offer long‐term claimants a lump sum final payment in lieu of a regular future income.
  • Reputational risk and PRE considerations if claims philosophy not in line with policyholders expectations. Also, increased costs of new claims control measures will limit any reduction in premium rates.
• Reduce anti‐selection effect
  • Target only lower risk business (e.g. with regard to age, sex, occupation) to allow for lower risk margins.
  • Sell product as rider benefit only (e.g. when purchasing a mortgage).
  • Better training of sales teams to identify anti‐selection.
  • Effect regular policy reviews to identify over‐insurance.
  • But, may lead to significant reduction in business volumes and any additional costs incurred will reduce possible premiums reductions.
• Pay less commission on sale
  • Lower incentive to sale may reduce overall business volumes.
  • Increase proportion of commission successfully clawed back in event of withdrawal.
  • May also reduce incentive to sale and any increased administration costs associated with this may outweigh the benefits.
• Reduce on‐going expense loadings
  • Streamline processes to increase efficiency.
  • But, may result in poor customer service and reputational risk.
  • Cross‐subsidise from policies with higher premium rates to those with lower premium rates and/or between different distribution channels etc to increase competitiveness.
  • But, creates risk that mix of business sold is different to that assumed, leading to future losses.
• Invest funds held in assets with a higher expected return
  • Can reduce cost of future claims outgo.
  • But, introduces greater uncertainty and mismatching risk. Also, need to consider whether any regulatory risk associated with such a mismatch.
• Reinsurance
  • Make more effective use of reinsurance arrangements.
  • Typically, this will mean retain more risk (assuming that reinsurance premiums include profit loading for reinsurer).
  • But, increased claims volatility will result from higher retained risk.
• Guarantees
  • Remove/reduce the level of any guarantees in the policy.
  • Introduce or extend use of reviewable/renewable premiums.
  • But, such steps are also likely to reduce marketability.