Practical Aspects of Reviewable Rates Beware Evil

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Practical Aspects of Reviewable RatesBeware
Evil
Shafique Bhunnoo 2003 Healthcare Conference5th
October 2003
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Practicalities

• Need to consider all parties
• Product Structure
• Communication
• Pricing strategy
• Dependence on Reinsurance
• Reviews in Practice

Look at all the Costs, Consider all the Risks
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The Usual Suspects

• Customers
• Distributors
• Insurance Companies
• Owners AND Employees
• Reinsurers
• FSA
• ABI
• Consumer Groups
• Media

Many Points of View to Consider
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Product Structure - What is reviewable?

• Review Triggers
• Time trigger
• Experience trigger
• Anticipated change in experience
• Reviewable or renewable?
• Guaranteed insurability
• Terms and conditions may change

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Product Structure

• Which elements are reviewable?
• Mortality/morbidity
• Lapses
• Economic assumptions
• Expenses
• Changes in taxation
• Reinsurance costs
• Prospective view or experience-based only?
• Are we only playing catch-up?
• Not about subsidising past losses?

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Product Structure

• Endless possibilities for variety
• Catch-up reviewability
• mortality/morbidity only
• all elements
• something in-between
• Keep-upreviewability
• Deferred reviewability
• Capped reviewability
• Renewable products
• potential to change terms and conditions

Choices, Choices
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Communication

• Initial communication
• Legal wordings
• Literature
• Press releases
• On-going communication
• How much detail?
• Will they believe/trust the communication?

Costly?
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Pricing Strategy

• Competition -
• Level and presence (!) of guaranteed rates
• Where do you pitch your reviewable rates?
• Low
• High
• Will rates be equally sticky up and down?
• Who will be the first to move rates?
• Churning and selective lapsing
• Managing policyholder expectations

Do you feel lucky?
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Pricing Strategy - Reinsurance

• Link price to Reinsurance?
• Review of Reinsurance - does it follow underlying
  product?
• Mis-alignment of interests, financial versus
  reputational risk
• Specification of review process in treaty
• Resolution of disputes and recapture process

Extra Layer of Complexity
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Backroom Operations

• Changes to cope with
• Changes in premium, commission and reinsurance
  rates
• Staying in touch with policyholders
• Monitoring experience
• Future reviews
• On-going communication with all parties

Costly ?
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Mis-Selling Risk - Taste of Future?

• FSA Ruling on Lloyds TSB High income bond
• The case suggested that common practices such
  as
• Pointing out risks in literature but not
  attempting to quantify them
• Categorising products into a few broad attitude
  to risk groups, and
• Using a check box -approach to assess suitability
• Are UNLIKELY to provide adequate protection
  against accusations of mis-selling.
• Watson Wyatt e-alert for Appointed Actuaries
• FSA ruling on Lloyd s TSB's high-income bond -
  1st October 2003 

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Some Risks

• Endless possibilities for complexity
• Disputes with reinsurers
• Potential mis-selling
• Higher compliance costs
• Higher costs and admin complexity
• Communication and literature
• Dis-illusioned consumers

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Lets Discuss