Changes to a contract

Is the design change applicable to existing policies, or just new ones? How to disclose the change to the customer? If the change involves a new partner, will there be an issue of reputation? Economies of scale?

Whenever you are talking about expenses, you need to specify the types of expense you talk about

If the contract is simple, the following advantages are obtained

Reasons for changes
  • current products are unprofitable
  • business volumes are low.
  • changes in legislation open new opportunities
  • changes in legislation require re-design of existing products
  • new products launched by competitors.
From product design point of view
  • Profitability
    The company MUST ensure that the premiums charged will be sufficient to cover the benefits to be provided and the expenses incurred in most foreseeable circumstances and to provide an appropriate return on capital.
  • Marketability
    Clearly, the product offered needs to be attractive to participants in the markets in which it will be sold.
    How many conditions need to be fulfilled before the benefit is paid!
    How to increase the marketability: offer options, guarantees, services
  • Competitiveness
    For most insurance products, the main factor affecting the competitiveness will be the relative level of premium.
    Distribution channels are also of great importance.
    For WP or UL, the past bonus rates / past invesetment performance are more important.
    Other factors: reputation, brand recognition, large excess, limitations imposed by the policy, full premiums is required to be paid upfront.
  • Capital requirements
    Initial capital strain: initial expenses (such as commission and underwriting) plus statutory reserve required to be set up will usually exceed initial premium received.
    In practice, a life insurance company will aim to design a product so that the initial capital strain is kept to a minimum.
    Main methods:
    • minimising initial expenses
    • minimising statutory solvency requirements
  • Cross-subsidy
    • cross-subsidy between low and high premium contracts. Expense loading is proportional to the premiums.
    • between different distribution channels
    • between different types of product
      If the same premium is applied to all distribution channels.
      higher premiums may be charged for less price-sensitive products to enable more competitive premiums to be charged for other products
    • between new business and renewals
      as a result of lower administration costs for renewals
  • Sensitivity
    The company should aim to ensure that the sensitivity of future profits to variations in future experience is minimised.
    In life insurance, the main methods to assist here are:
    • match asset proceeds and benefit outgo as closely as possible with regard to nature, timing and currency
    • match charges accruing and expenses incurred as closely as possible with regard to nature and timing
  • Risk characteristics
    Consideration must also be given to the level of risk associated with a proposed contract design. In particular, the company must consider whether or not to absorb the risks internally.
  • Guarantees and options
    The actuary will also need to consider the onerousness of any guarantees and options included in the product design.
    Guarantees and options offered may relate to:
    • investment return on non-profit life insurance business
    • mortality on term assurance and whole life contracts
    • fixed expenses over the term of a contract
    • surrender values
    • renewability or convertibility options in life insurance contracts
    • conversion terms for guaranteed annuity contracts
    • indexation of pensions in payment
    The main problems caused by offering such guarantees are:
    • the possibility that unfavourable future experience will give rise to an unexpected loss, and
    • the requirement to reserve for this possibility from the outset, thereby increasing the capital strain
  • Administration systems
    In practice, the contract design is limited by the administration systems of the company. Thus, the cost of enhancing administration systems to cope with new elements of product design must be weighed against the additional profits expected.
    In addition, simplicity of design is likely to be an advantage for non-technical staff, sales force, brokers and policyholders.
  • Consistency
    Companies often try to ensure that the design of a new product is consistent with the existing product base.
    Consistent with the providers' risk profile and risk appetite
From external environment
  • Regulation: may intervene, put pressure on the company to review
  • Public interest: the regulator may want the company to prioritize the interests of policyholders and the public as a whole.
  • Tax regime
  • Economic outlook
  • Reputation
  • Privacy issue
Others
  • Availability of data
  • How does it affect expense? Initial expense, renewal expense, claim expense
  • How does the policyholder perceive this change? What’s their reasonable expectation?
  • Will they change their behaviour?
  • Will it boost the sales of other contracts?
Conflicts of design objectives
  • Simlicity and risk appetite: if using cross subsidy, the policy may be complex but with lower risk.
  • Pprofitability versus marketablity
  • Marketablity versus risk