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Contract design (Parties involved in contract design (and factors…
Contract design
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Types of guarantees
Guaranteed benefits, e.g. a benefit of £100,000, or a benefit that is guaranteed in terms of an index
Guaranteed minimum maturity value, e.g. on a unit-linked contract
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Guaranteed charges, e.g. on a unit-linked contract
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Ways to reduce NBS
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Match charges with expenses, and keep charges variable
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Marketability
Guarantees, options and choices
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Features that distinguish the contract from that of competitors (although it could also be argued that it may be important not to depart too far from the design of competitors' contracts)
Types of options
Premium options
waiver of premium, option to increase/ reduce premium, option to choose/ change premium frequency
Benefit options
discontinuance, early or late or ill-health late retirement, spouse's benefits, rider benefits, option to protect a no-claims discount, option to commute benefits between income and lump sum.
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Definitions
Surrender
the policy stops, there is not further cover and the policyholder received a lump sum payment (the surrender value)
Lapse
the policy stops, there is no further cover and usually no payment is made to the policyholder by the insurance company
Paid-up
the policyholder ceases to pay premiums but the policy continues to offer the policyholder some cover. In this case the benefit is reduced to reflect that there are no more premiums and is called the paid-up value.
Withdrawal
this normally encompasses the first two examples above (surrender and lapse), as the policy does not stay in force
New business strain
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Initial expenses, provisions and solvency capital > premium received
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Cost vs price
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Price
the amount that can actually be charged under a particular set of market conditions. It may be more or less than the cost.
Profitability
The premiums charged should be sufficient to cover the benefits to be provided and the expenses and have a margin for profit in most foreseeable circumstances.
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