X 5.

(i)

- Incurred expenses to premium income

- Commission to premium income

- Operation ratio (total of incurred claims and expenses to premium income)

- Outward reinsurance premium to gross premium income

(ii)

- the strength of the bases used eg the large insurer should use best estimate to gain a realistic view of
the small insurer’s accounts

- The statutory and accounting rules that apply in the country of small insurer, and different assumptions
may used

- The accounts should be on going basis and give a true and fair view

- whether there have been any changes in accounting practice between valuation dates eg investment
return different to expected

- The impact of business growth of the small insurer

- The effects of underwriting cycle on the small insurer – if the country is currently in soft market or hard
market

- the reports accompanying the accounts (including occurrence of exceptional events, eg Earthquake,
hurricane)
X 5.2

Cautious/prudent will lead to a high value for liabilities, a low value for assets.

Optimist will lead to a low value for liabilities, a high value for assets.

From the perspective of the trustees and the beneficiaries

- Best estimate to gain a realistic estimate of future benefits

- Cautious basis to ensure better security of benefits
- But not so cautious that the sponsor believes the cost of benefits to be excessive and hence
reduces future benefits, closes the scheme to future accrual, or pays high contribution rate and
becomes insolvent

From the perspective of the sponsor

- Optimistic if there is a high opportunity cost of capital, eg the company can use the capital at
somewhere else
- Cautious if higher contributions now may lead to greater flexibility in the future eg if large
benefits to pay out in the future
- Cautious if higher contributions may result in tax deferral
- Cautious if the sponsor wants to be viewed as paternalistic
- Cautious if there is a low opportunity cost of capital
- Cautious if better investment returns can be eared within the scheme leading to lower long-
term costs
- Best estimate for stability of cost and a compromise between the above factors
X 5.3

(i)

1. Closure of the scheme to new members, with continued contributions in respect of existing
members
2. Closure of the scheme to new members, without continued contributions in respect of
existing members
a. The benefit may remain in force to meet accrued benefits
b. The benefit may be wound up
i. By applying the assets to the purchase of individual insurance contracts for
the beneficiaries
ii. By transferring the assets and liabilities to another scheme

(ii)

Option 1

- Implications
o Gradual removal of the liabilities by continuation of the scheme without any further
accrual of benefits
o Rate as % salary likely to increase and become more volatile
- Costs involved
o Management costs of the scheme. The scheme is keep running for the existing
members.
o Benefits paid to the existing members
o Administration expenses of informing new members the close of scheme
o Contributions to the scheme to cover the benefits of existing members

Option 2

- Implications
o One off settlement may be needed if the scheme is in deficit. Then no further
contributions.
o Transfer of the liabilities to another scheme with the same sponsor
 o Transfer the funds to the beneficiary, as cash or to place with an insurance company or
in the scheme of any new employer
o Transfer of the funds to an insurance company to invest and provide a group policy or
an individual policy in the beneficiary’s name
o Transfer of the liabilities to an insurance company to guarantee the benefits
o Transfer of the liabilities to a central discontinuance fund, operated on a
national/industry-wide basis
- Costs involved
o Fees to hire actuary to calculate the one-off settlement
o Administration expenses of informing beneficiaries the close of scheme
o Purchase of annuity from a life insurer if transfer the liabilities to an insurance company
o If transfer the liabilities to another scheme, fees related to calculation of provisions
o Expenses related to the transfer of scheme
X 5.4

3. Improve existing policies in other ways

Reducing charges or reducing reviewable premium rates
4. Distribute to different parties
Give bonuses to policyholders
5. Retain within the company, increase the amount of capital
a. Take on more risk
b. Fund new business strain
c. Take strategic opportunities (expanding into new market, invest in new product)
X 5.5

Features of the data required

6. There should be a reasonable volume of stable, consistent data, from which future
experience and trends can be deduced
7. Data should be divided into homogenous risk groups by risk factors, subject to there being a
sufficient quantity of data in each group to give credible results
a. Too few groups – not homogeneous
b. Too many groups – not enough data
c. To compromise, may split into age bands
8. Key risk factors to subdivide the data are:
a. Age, gender, smoke status, duration inforce
9. When assessing decrements, eg claim rates
a. data is required on both the risk event eg claim of critical illness, and the exposed to
risk, number of policyholders
b. Consistency between the two is essential

Number of years of data

10. Some critical illnesses can be rare, include a large number of years to ensure enough data
11. Make sure the number of years is long enough to have enough data in homogenous groups
12. However, if there is a change of trend, eg a type of critical illness claims increased
significantly in recent years, early years’ data is not representative of today’s trend, then
should use only recent years’ data
13. If in the past the data is not recorded in a clean and easy to analyses way, may use a shorter
period of data
X 5.6

Without-profit immediate annuities

As this is without-profit, the company bears all of risks i.e. mortality, longevity, expenses etc

- Mortality/longevity +10m to surplus

o If mortality rate increases, policyholders will not receive annuities after their death. The
company’s future liabilities will decrease thus surplus will increase.
o If longevity rate decreases, policyholders will live shorter than expected. The company
will pay less annuities than expected. Surplus will increase.

- Withdrawal +0m
o Early withdrawals before expenses are recouped would lead to a decrease in surplus. In
this case premiums collected are not enough to cover the initial expenses.
o The company will cease annuities if policyholders withdraw. This will lead to an increase
in surplus.
o In case of selective withdrawals, healthy policyholders will stay in the policies. The
company will pay more annuities for healthy policyholders who will live longer than
unhealthy policyholders, this lead to an decrease in surplus.
o Overall, the positive and negative contribution to surplus offset each other.

- Investment return -2m

o Negative investment returns will lead to a decrease in surplus.
o The company has probably mainly invested government and corporate bonds. Over the
year their yields fell at all terms. There is a loss from investments.
o It may have invested small portion in bonds which made a profit.
o But it is not enough to compensate the loss made from bonds.
With profit unit-linked saving policies

With profit policy, the experience risks are shared between policyholders and shareholders.

- Mortality/longevity -0.2m to surplus

o If mortality rate increases, there are more chance that policyholders die before
retirement. The company will pay more death benefit which is 105% of the value of the
unit funds. This will lead to a decrease in surplus.
o The small decrease in surplus is probably due to a small increase in mortality rate.
o This can due to the change in trend, or a rare event eg. Earthquake, hurricane.

- Withdrawal -8m
o The policyholders will receive a benefit at retirement, with a guaranteed minimum
benefit amount equal to the total of all premiums paid. The withdrawal benefit is 100%
of the unit funds.
o There is risk of selective withdrawals.
o When the value of unit funds is higher than the total of all premiums paid, policyholders
have interest withdraw to receive 100% of the unit funds.
o This is because in the future, the value of unit funds may drop, policyholders may
receive less benefit.
o Policyholders will stay in the policies if the value of unit funds are less than the total of
all premiums paid.
o Since the policy is guaranteed, the company will make up the shortfall between the fund
value and the total premiums paid. This will lead to a decrease in surplus.
o Early withdrawals before expenses are recouped would lead to a decrease in surplus. In
this case premiums collected are not enough to cover the initial expenses.
o Policyholders have interest to withdraw the policy, this lead to an important decrease in
surplus.

- Investment return +0.1m

o Positive investment returns lead to an increase in surplus.
o The company has mainly invested in equity, and benefit from the rise of equity market
values.
o It may have invested small portion in bonds which made a loss.
o This is compensated by the gain made from equity investment.
X5.7

- amend withdrawal policy

o lower the withdrawal benefit i.e. X% of the unit funds
o When designing the withdrawal benefit, ensure fairness between policy
 The policyholder or member who is leaving
 The remaining policyholders or members
 The provider of the benefits
o introduce a minimum policy length i.e. no withdrawal benefit if withdraw within Y
months. This will ensure premiums are collected to cover the initial expenses i.e.
underwriting

- monitor by sales channel and agent

o Products are sold through independent intermediaries. Ask intermediaries to monitor
the number of withdrawals
o Ask reasons for withdrawals
- commission clawback
o If early withdrawal is made, intermediaries will return commission to Proper.
- monitor fund performance
- make sure customer service is good
- reduce administration expenses of determining the withdrawal benefit
- make sure the withdrawal benefit is competitive enough compare to other life insurers, to not
loss customers
X 5.8

Two types of assessments of capital:

- Regulatory capital is capital required by the regulator to protect against the risk of statutory
insolvency.
o Protection against adverse experience
o Regulator may prescribe method and assumptions by which amounts are calculated
 A standard formula prescribed by regulation
 Or company’s internal model
- Economic capital is the amount of capital the provider determines it is appropriate to hold given
its assets, liabilities, and business objectives.
o It is based on
 The risk profile of the individual assets and liabilities in its portfolio
 The correlation of the risks
 The desired level of overall credit deterioration that the provider wishes to be
able to withstand
o Internal model maybe used to calculate Economic capital
- Regulatory capital requirement is not risk based, making it difficult to ensure that sufficient
security is provided to policy holders.
- Economic capital requirement is risk-based.

The economic capital requirement may be lower than the regulatory capital requirement

- The economic capital assessment may use best estimate assumptions, whereas the assumptions
for the regulatory capital assessment may be more prudent. Therefore the amount of capital the
company would itself consider to be necessary could be lower than the regulator requires the
company to hold.
- The approach to valuing assets may differ between the two capital assessments e.g. some of the
assets may be inadmissible, i.e. cannot be included when assessing the regulatory capital
position.
- The key objective for the regulator will be to protect policyholders.
- The regulator may
o Be cautious in its assessment and require a higher level of capital than the insurer might
choose
o Base the assessment on an average company with average risk but the insurer and the
business it writes may be less risky than average
o Not allow for any benefits of diversification or hedging but this may significantly reduce
capital requirements e.g. if the insurer writes annuity and whole life assurance business
then there is a mortality offset
X 5.9

- Reinsurance
o Financial
 A loan from the reinsurer to the insurer, which increases the value of the assets
by the amount of the loan. There is no change on the liability.
 Improve both the regulatory position and the economic position
o Tradition
 Purchase reinsurance eg QS, XL, which decreases the value of the assets by the
reinsurance premium. The liability decreases by the amount of reinsurance
coverage.
 The regulator may reduce the amount of regulatory capital that the company
must hold.
 Improve the regulatory position. No impact on the economic position.

- Equity
o Issues of shares to existing shareholders
o Issues of shares to new shareholders
o Shareholders pay cash now to buy shares. The company pay shareholders dividends in
future.
o Assets increases by the value of the issued shares. There is no change on the liability.
o Improve both the regulatory position and the economic position

- Securitisation
o Proper issues a bond to the capital markets, the repayments on the bond are contingent
on a risk event not happening. Eg revenue below Xm
o Proper issues bonds on a block of business eg Immediate annuities and unit linked
saving products
o Investors pay money to purchase the bond
o Proper pays coupons and redemption amount from revenues on Immediate annuities
and unit linked saving products
o Payments will default if the securitized business eg. Immediate annuities and unit linked
saving products failed to produce Xm of revenue
o Assets increases by the purchase price of the bond. There is no change on the liability.
o Improve both the regulatory position and the economic position
- Ordinary debt
o The company borrows money from the bank.
o Assets and liability increases by the amount of debt.
o No improve on the regulatory position and the economic position

- Subordinated debt
o The company borrows money from the bank.
o Debt ranks behind policyholders’ reasonable expectations. Repayments will only be
made on the debt after policyholders’ benefits being paid.
o Assets increases by the amount of debt. There is no change on the liability.
o Improve both the regulatory position and the economic position
X 5.10

If the required level of solvency capital is breached, the regulator intervenes to protect the interests of
existing or prospective policyholders.

Regulator can require the company to

- Close to new business

- Establish a recovery plan, which is monitored closely by the regulator-
o Changing the investment strategy to invest in assets that better match the liabilities
o Increasing the amount of reinsurance the company has in place
o Limiting the levels of new business sold