Question

 Withdrawals volatility can lead to sudden decrease in the number of policies in the portfolio
 Decrease in the number of policies can cause high share of fixed expenses amongst each policy
 If premium while selling did not account for such variations, then company may experience losses due to high
fixed expenses per policy
 Adverse withdrawal experience can also lead to withdrawal of good quality lives from the portfolio (selective
withdrawal)
 Leading to worsening of mortality experience in the portfolio
 Worse than expected mortality experience can lead to higher-than-expected claim pay-out
 Again, leading to losses or profits sufficiently lower than expected
 High withdrawal and high claim numbers can also lead to high administrative expenses
 High withdrawals can also lead to change in investment strategy leading to high and unexpected investment
charges

Question

 New Business Volume

o Since the product may appeal to wider range of audience, the company may receive a lot of business
i.e. there is a risk of receiving higher business than expected
o High business volume creates new business strain and put pressure on capital of the company
o This may also lead to regulatory intervention which may lead to stop selling new business to
maintain capital Level
o High business volume may create administrative problems
 Like old employees may have to work overtime
 If new employees are hired, they may be inexperienced
o This can further lead to bass press and marketing Risk
 Contract Design
o Since a new policy is being introduced, there could be risk of loose policy wordings
o This may create legal risk
o And more expenses in terms of legal expense and payout if claimants win the legal battle
 Persistency Risk
o There could be risk of higher withdrawal in early years when asset share is less than the surrender
payment
o Higher withdrawals than expected can cause capital strain and losses to the company
 Expense Risk
o Expenses can turn out to be higher than expected. This is higher risk since charges are fixed for the
complete duration
o Expense Inflation could be higher than expected

Question:

o Risk Appetite
o Considerations should be paid whether regular premium correspond to the risk appetite of
both customers and company
 o Regular premium may attract lots of customers but later on it can act as a counter party risk to
the company if the policyholders do not pay regular premium (like in case of poor economic
environment)
o Regulatory environment
o Product design should correspond to the regulatory restrictions imposed on the product
o Surrender penalty should not be so high that surrender value paid to policyholders fall below
the regulatory minimum guaranteed amount
o Competition
o Company needs to assess the products offered by competitors.
o The products offered should not be very far away in design from competitors and on the same
hand should also have some product differentiation to attract customers
o Profitability
o Assumptions need to be made for:
 Withdrawals
 Expense
 Expense Inflation
o High early withdrawals may create strain on capital and leads to losses
o Sufficient margins need to be built for constant nature of expense charge to maintain
profitability
o Administration
o There could be high administrative complexity due to regular premium and surrender option
o Staff needs to be properly trained to minimise errors and cost
o Expectations of policyholders
o Surrender payments should be as per PRE

Question:

i)

o Investment Strategy
o Competitor may have a better investment management team which is able to generate higher
returns from the market
o Investment expenses could be lower than ones experienced by competitors maybe by using
passive investment strategy
o Reserving
o Competitor may be using additions to benefit approach towards bonus distribution
o Competitor may have built a higher reserve over the past policy period which is now being
used to extensively to provide benefits to the policyholders
o Deferring of profit in contribution method is limited than the addition to benefit approach
o Management Approach
o Management may be offering benefits such as lower premium and high dividends to lure
potential customers or to increase market share
o Management maybe highly cross-subsidising whole life with other products, thereby
decreasing whole life product expenses and increasing reserve
o Product being offered may be a loss leader and is just being offered to attract more customers
o Regulatory Advantage
 o Competitor may have found a loophole in regulatory restrictions leading to demonstrate
lower capital requirement for the specific product
o And high amount available for bonus distributions
o Assumptions
o Assumptions such as longevity made for the future could be overly optimistic leading to lower
reserve being maintained

ii)

o Profitability
o Margins need to be reduced in existing product to decrease premiums
o Assumptions can be loosened up, keeping in mind the regulatory requirements
o Cross Subsidy
o Cross subsidy can be provided from other products so that the company can manage the
expense on the whole life policy
o Capital Requirement
o Capital can be restructured to the regulatory minimum to offer more bonus to the
policyholders’
o However, increasing sum assured would lead to increase in the reserve thereby required
o Other Design:
o Company can charge higher surrender penalty to make up for the loss in profitability due to
less premium

Question:

 The company needs to take into consideration the work performed by the employees in the company
 Office jobs tend to have lower rate of mortality than physical workers or people working in unhealthy
environment
 Different rates can be charges to people performing different jobs. However, there could be
discontentment if employees are paying different rates from their pocket
 Average pay scale also be taken into consideration. Higher pay scale generally means affordability of
nutritious diet, thereby reducing mortality risk
 Other factors such as:
o Education level of employees – Higher education level generally correspond to lower mortality
o Location of office and residence – Better locality in terms of environment quality, availability
of hospitals nearby etc. also affects mortality rates

Question:

i)

 Persistency rates need to be allowed for in the product pricing. However, incorrect estimation can
lead to losses to the company
 In initial stages if withdrawal rates are higher than what has been estimated for in the pricing and
surrender value is greater than the asset share, then company may experience lot of losses
 Even, later in the contract year if the withdrawal rates are lower that has been estimated and the
company is earning profits through surrender penalty, then the total profit earned would be lot less
than that was accounted for when product was designed

ii)
  The industry stats could be out of date
 The industry stats may not have been affected by:
o Random fluctuation
o Spurious trends in the past
 The product offered may not be similar to the one being offered by other industry participants
 Industry stats may be biased due to survivorship bias
 Distribution channel used by different industry participants could be different than the life company
 There could be recording errors in the industry data
 Industry stats may not be a good representation of the future
 Data used to calculate stats may not be credible enough

 CAPM ensures that the Actuary considers the respective risk of the project while estimating the risk
discount rate

 Beta of the project helps in determining the relationship/ sensitivity of the return of the project with
respect to market.

 Higher values of beta relate to higher volatility and should also correspond to higher expected rate of
return. CAPM has a positive relationship with beta and higher values of beta lead to higher discount
rate, thereby encompassing the risk of the project

 CAPM ensures by calculating DR that the investor is adequately compensated for taking higher risk
than risk free rate by calculating higher DR for high risk project

Question:
Merits:
 Valuation using passive approach is easy to perform
 The process is less subjective once the method of valuation of assets and liabilities have been decided
 Valuation method is easy to explain
 Passive Approach can help in maintaining consistency between different offices (even internationally)
within the organisation
Demerits:
 Passive Approach doesn’t cope up with the market trends
 The approach may not be allowed as per the regulations
 It may give false sense of security if the assets are over-valued than market values
 Policyholders or investors may not be able to obtain a clear picture of company’s accounts

Question:
i)

a)
  Large issue of bond would help in maintaining marketability and hence, can help to quickly sell of
bonds to make payment of level annuities or surrender if possible
 However, investing in low grade bonds increase the credit risk/ counterparty risk faced by the
company and default on bonds can lead to insolvency if the invested amount is large
 The return would be highest and may help in increasing the overall return of the investment portfolio
b)
 Credit Risk and counterparty risk would be lower than the low grade bond but still higher than the
Government bond
 Marketability may be an issue due to the small issue size
c)
 Credit Risk is the lowest of all
 Marketability is high due to large volumes
 Return is the lowest of all option
Remark:
 Investing in only one type of bond may not be possible due to their inherent disadvantages
 Investment needs to be made in all types of bonds so as to maintain risk within risk appetite and also
earn decent return
 There may be some regulatory restrictions which may influence investment decision

ii)
 Each bond would have a different YTM depending on the marketability premium and default risk
 LI may want to go for weighted average of returns to determine the discount rate.
 Weights would be based on the amount invested in the different bonds

Question:
 There may be low level of free capital in the company. Opting for reinsurance helps in decreasing the
volatility of claims and thereby decreasing the capital requirements.
 LI company may be a new entrant in the term assurance market. Hence, they may want to benefit
from the expertise of the reinsurer
 Shareholders do not generally like volatile dividends. Hence reinsurance helps in achieving smooth
profits over the year
 Customers in the market may better value the security provided by the reinsurer to the company and
hence may be able to sell more business
 With the help of reinsurance, LI company can write large business, leading to better business mix and
claim experience
 There may be regulatory requirements to opt for reinsurance for this type of product
Question:
 Risk Appetite of the management
 Mortality experience of the competitors on the similar products
 Retention limit opted by competitors
 Mortality Improvement assumptions over the year – Medical Advancements
 Assumptions regarding take up rate of conversion option
 New Product – There could be defects in product design – May require higher limits of reinsurance
 Level of cover offered by the reinsurer
 Target Market of the product – Since ads are placed in newspaper, general target market would be
elderly, having volatile mortality experience
 Minimum Requirements placed by regulator