Contract Design
Contract Design Factors
R – Reinsurance
• Availability, extent and price
A - Administration system
• Does the company have the required administration systems in place to cope with the
new product
• Consider if additional features needs to be captured that isn’t currently, that could
possibly aid in future experience analyses
M – Marketability
• Explain how this product differs from those currently in the market and how it will make it
more attractive to certain policyholders
• Consider the size of the potential target market, and whether their size be sufficient to
meet sales targes to meet profitability and expense requirements
• Consider the sales channel this product will be sold through
P – Profitability
• Add an appropriate profit criterion to the premium
• Margin to add additional layer for expenses that might be incurred during the
underwriting phase
L - Level and form of benefits
• Set out purpose of product, i.e., provide regular income stream for lime
E - Early leaver benefits
• Is discontinuance possible? For products such as annuities it is not possible. There is a
possibility of cashing the annuity in. This can be done on a very conservative basis
keeping anti-selection in though
• It will however need to be included in the contract design and communicated accordingly
to policholders
Surrender: The policy stops, there is no further cover, no further premiums are paid and the
policyholder receives a lump sum payment
Lapse: The policy stops, there is no further cover, no further premiums are paid and no payment is
made to the policyholder by the insurer
Paid-up: The policyholder ceases to pay premiums but the policy continues to offer the policyholder
some cover. The cover is reduced to reflect that there are no more premiums
D - Discretionary benefits
• The product can potentially be structured as a with-profits product which allows for
discretionary increases in benefits.
• The life office can consider whether there is any room to allow for discretionary benefits
such as higher than inflation increases or additional annual payments ("13th cheque"
type benefit) when the underlying performance of the investments warrant this.
• It would need to be careful to not create a reasonable expectation on the side of the
policyholder, which may require the discretionary benefits to almost be priced in, in
which case the level of upfront annuity may actually be lower.
I - Interest/need of the customer
• The product will be required to meet the needs of the target market
• In this case the primary need is to provide …
R - Risk appetite
E - Expenses vs charges
C – Competition
• Consider how and if competition will respons. Will this influence the profitability of future
products if they launch a similar product
T - Terms and conditions
• contract wording with terms and conditions would need to be drawn up that is both fair to
the policyholder and protects the life office from moral hazard and anti-selection.
• Consideration would need to be given for what to do in instances where the policyholder
provided wrong or fraudulent information in the underwriting process
F - Financing (capital requirements)
• Consider how onerous capital requirements will be (especially for guarantees) and how it
will affect the existing capital position
A - Accounting implications
C - Consistency with other products
T - Timing of contributions or premiums
O - Options and guarantees
• Guarantees
o The life office would have to consider the cost of providing this guarantee as well
as the availability of investments to match this liability.
o To improve marketability, there may be a guaranteed annual increase in the
benefit amount, perhaps to keep up with inflation.
R - Regulatory requirements
• Regulatory requeriement relating to the product features and sales channel that needs to
be considered
• New product, ensure regulation allows for the launch of a new product
S - Subsidies (cross)