LPM Section 4
List 6 levers for effective in-force management
- answerLPM-153: Life In-Force Management
Main goal: get more profit out of in-force business (don't just try to sell more business)
1. Steering liability portfolios to support strategic ambitions and financial targets
2. Improving persistency
3. Improving claims management
4. Adjusting asset management subject to regulatory constraints and risk appetite
5. Optimizing capital
6. Increasing operational efficiency (reducing costs)
List the steps for applying a holistic in-force steering framework
- answerLPM-153: Life In-Force Management
1. Set financial targets
2. Determine constraints
3. Project future market conditions
4. Identify opportunities and rank by attractiveness
5. Specify target liability portfolio
6. Manage asset portfolio
7. Optimize capital structure
8. Verify that constraints are met
Describe ways that insurers can re-design products and develop services to manage in-
force blocks. - answerLPM-153: Life In-Force Management
1. Align product strategy to cope with changing market conditions
§ Lower/abolish guaranteed benefits
§ Shift interest rate and market risks to policyholders with unit-linked products
§ Reprice biometric risks (mortality)
2. Prepare for rising interest rates (shock lapses)
3. Develop new services to improve consumer value (e.g. wearables)
Define cross-selling and up-selling and list their benefits and challenges
- answerLPM-153: Life In-Force Management
‚ Cross-selling - selling a new product to an existing customer
‚ Up-selling - upgrading an existing customer's product
‚ Benefits:
1. Cross/up-sell when policyholder reports a claim
,2. Reduce costs/prices by targeting good risks
3. Diversify underwriting risks
‚ Challenges: fragmented IT, silos, insufficient demographic info
List 3 solutions for reducing the risk in unprofitable blocks of business.
- answerLPM-153: Life In-Force Management
1. Adjust non-guaranteed elements (dividends, crediting rates, premiums)
2. Exchange/conversion programs
3. Buyout programs (buy back unprofitable products)
List 4 options for dealing with unprofitable or non-core run-off business
- answerLPM-153: Life In-Force Management
1. Retain and run off to expiry
2. Outsource to a third-party administrator (TPA)
3. Reinsure with maintained or outsourced administration
4. Sell block
Also, try to recall or list out pros and cons of each of these!
Describe 5 methods for improving persistency on in-force blocks
- answerLPM-153: Life In-Force Management
1. Response levers: premium holidays, discounts, exchanges
2. Gradual transitions to ART for term business
3. Behavioral economics: understand consumers' evolving needs
4. Predictive analytics on lapse prediction
5. Increase customer engagement (mobile, social media, etc.)
List at least 4 methods for improving claims management
- answerLPM-153: Life In-Force Management
1. Increasing process efficiency with automation
2. Enhancing claims experience: easy, effective, and timely
3. Improving fraud prevention and detection: notifications, training
4. Claims analytics improvements: easier data collection and predictive modeling
5. Health recovery and job reintegration support: LTC/disability claimants
6. Nudging health-related behaviors: text reminders, behavioral economics
List ways that insurers can adjust asset management for in-force blocks
- answerLPM-153: Life In-Force Management
1. Improve asset-liability duration match
2. Hedge investment risks with derivatives
3. Invest in higher-yielding assets
§ Alternative investments (private equity, hedge funds)
§ Less liquid asset classes (RE, infrastructure, CMTGs)
§ Lower-rated bonds (BBB corporates, etc.)
,Describe ways that insurers can optimize capital on in-force blocks
- answerLPM-153: Life In-Force Management
Stabilizing Cash Flows and Earnings
‚ Transferring mortality/morbidity risks - reinsurance, cat bonds
‚ Reinsure longevity risk on life annuities
‚ Transferring lapse risk - VIF solutions, non-proportional lapse risk reinsurance
Freeing Up Trapped Capital
‚ XXX/AXXX excess reserve financing
‚ Monetize VIF or sell block
Describe ways that insurers can increase operational efficiency for in-force blocks
- answerLPM-153: Life In-Force Management
‚ Modernize the IT landscape
§ Overhaul IT core system
§ Increase process automation
§ AI solutions: product design, customer relations
‚ Possible ways of optimizing operations
§ Outsourcing
§ Transferring operations to lower cost offshore captives or reinsurers
Describe the 3 sources of mortality volatility
- answerLPM-157: Diversification of Longevity and Mortality Risk
1. Trend risk - uncertainty in future mortality improvement driven by 3 factors:
1.1 Long-term trends (changes in medical practice, society, economy, environment,
etc.)
1.2 Annual volatility (extreme weather, disease, etc.)
1.3 Correlation between long-term and annual trend volatility
2. Basis risk - uncertainty in the assumed mortality level
§ Higher uncertainty in best estimate = higher basis risk
3. Long-term underwriting risk - uncertainty in 3 factors:
3.1 Initial select period
3.2 Length of grading off period for preferred or substandard
3.3 Ultimate mortality level
Describe how to quantify the mean cost of mortality volatility
- answerLPM-157: Diversification of Longevity and Mortality Risk
Mean cost of volatility using distributable earnings =
Deterministic PV(DistEarn) - Stochastic Mean PV(DistEarn)
Mean cost of volatility using IRR =
Deterministic IRR - Stochastic Mean IRR
, Deterministic does not capture tail asymmetry (overstates expected profits)
Describe the importance of stochastic modeling when quantifying a mortality/longevity
hedge between a term product and a single premium immediate annuity - answerLPM-
157: Diversification of Longevity and Mortality Risk
‚ Combined deterministic IRR does not reflect diversification
§ « weighted average of term and SPIA IRRs
‚ Combined stochastic IRR > either standalone IRR
§ Reflects mortality/longevity hedge
‚ Stochastic analysis shows conservatism in deterministic margins
§ Can allow insurer to adjust deterministic margins based on risk appetite
Describe how to quantify diversification savings with a mortality/longevity hedge
- answerLPM-157: Diversification of Longevity and Mortality Risk
Diversification Savings =
Combined PVDE - (Standalone Term PVDE + Standalone SPIA PVDE)
‚ Diversification savings increase near the tail
‚ Increasing SPIA volume increases diversification savings
Describe 4 common GLWB product designs
- answerLPM-156: The Impact of Stochastic Volatility
Designs | Benefit Base: WBB- (t+1) | Guar. Withdrawal: W guar- (t+1)
1. No Ratchet | WBB+ (t) | x WL x P
2. Lookback Ratchet | max(WBB + (t), AV- (t+1) | x WL x WBB- (t+1)
3. Remaining WBB Ratchet | max(WBB+ (t), AV- (t+1) | W guar+ (t) + x WL x max( AV-
(t+1) - WBB+ (t), 0)
4. Performance Bonus | WBB+ (t) | x WL x P + 0.5 max( AV- (t+1) - WBB+ (t), 0)
1. No Rachet: WBB and W guar (t) are constant all years
2. Lookback Ratchet: WBB = highest AV -> allows W guar (t)
to increase
3. Remaining WBB Ratchet: Like Lookback, except WBB decrease's with withdrawals
4. Performance Bonus: WBB decrease's with withdrawals but never increases
Describe the 4 possible transitions each anniversary when modeling a VA GLWB
- answerLPM-156: The Impact of Stochastic Volatility
1. Death -> contract terminates
2. Alive, but no withdrawal
3. Alive and makes a withdrawal W(t) <= W guar- (t)
List 6 levers for effective in-force management
- answerLPM-153: Life In-Force Management
Main goal: get more profit out of in-force business (don't just try to sell more business)
1. Steering liability portfolios to support strategic ambitions and financial targets
2. Improving persistency
3. Improving claims management
4. Adjusting asset management subject to regulatory constraints and risk appetite
5. Optimizing capital
6. Increasing operational efficiency (reducing costs)
List the steps for applying a holistic in-force steering framework
- answerLPM-153: Life In-Force Management
1. Set financial targets
2. Determine constraints
3. Project future market conditions
4. Identify opportunities and rank by attractiveness
5. Specify target liability portfolio
6. Manage asset portfolio
7. Optimize capital structure
8. Verify that constraints are met
Describe ways that insurers can re-design products and develop services to manage in-
force blocks. - answerLPM-153: Life In-Force Management
1. Align product strategy to cope with changing market conditions
§ Lower/abolish guaranteed benefits
§ Shift interest rate and market risks to policyholders with unit-linked products
§ Reprice biometric risks (mortality)
2. Prepare for rising interest rates (shock lapses)
3. Develop new services to improve consumer value (e.g. wearables)
Define cross-selling and up-selling and list their benefits and challenges
- answerLPM-153: Life In-Force Management
‚ Cross-selling - selling a new product to an existing customer
‚ Up-selling - upgrading an existing customer's product
‚ Benefits:
1. Cross/up-sell when policyholder reports a claim
,2. Reduce costs/prices by targeting good risks
3. Diversify underwriting risks
‚ Challenges: fragmented IT, silos, insufficient demographic info
List 3 solutions for reducing the risk in unprofitable blocks of business.
- answerLPM-153: Life In-Force Management
1. Adjust non-guaranteed elements (dividends, crediting rates, premiums)
2. Exchange/conversion programs
3. Buyout programs (buy back unprofitable products)
List 4 options for dealing with unprofitable or non-core run-off business
- answerLPM-153: Life In-Force Management
1. Retain and run off to expiry
2. Outsource to a third-party administrator (TPA)
3. Reinsure with maintained or outsourced administration
4. Sell block
Also, try to recall or list out pros and cons of each of these!
Describe 5 methods for improving persistency on in-force blocks
- answerLPM-153: Life In-Force Management
1. Response levers: premium holidays, discounts, exchanges
2. Gradual transitions to ART for term business
3. Behavioral economics: understand consumers' evolving needs
4. Predictive analytics on lapse prediction
5. Increase customer engagement (mobile, social media, etc.)
List at least 4 methods for improving claims management
- answerLPM-153: Life In-Force Management
1. Increasing process efficiency with automation
2. Enhancing claims experience: easy, effective, and timely
3. Improving fraud prevention and detection: notifications, training
4. Claims analytics improvements: easier data collection and predictive modeling
5. Health recovery and job reintegration support: LTC/disability claimants
6. Nudging health-related behaviors: text reminders, behavioral economics
List ways that insurers can adjust asset management for in-force blocks
- answerLPM-153: Life In-Force Management
1. Improve asset-liability duration match
2. Hedge investment risks with derivatives
3. Invest in higher-yielding assets
§ Alternative investments (private equity, hedge funds)
§ Less liquid asset classes (RE, infrastructure, CMTGs)
§ Lower-rated bonds (BBB corporates, etc.)
,Describe ways that insurers can optimize capital on in-force blocks
- answerLPM-153: Life In-Force Management
Stabilizing Cash Flows and Earnings
‚ Transferring mortality/morbidity risks - reinsurance, cat bonds
‚ Reinsure longevity risk on life annuities
‚ Transferring lapse risk - VIF solutions, non-proportional lapse risk reinsurance
Freeing Up Trapped Capital
‚ XXX/AXXX excess reserve financing
‚ Monetize VIF or sell block
Describe ways that insurers can increase operational efficiency for in-force blocks
- answerLPM-153: Life In-Force Management
‚ Modernize the IT landscape
§ Overhaul IT core system
§ Increase process automation
§ AI solutions: product design, customer relations
‚ Possible ways of optimizing operations
§ Outsourcing
§ Transferring operations to lower cost offshore captives or reinsurers
Describe the 3 sources of mortality volatility
- answerLPM-157: Diversification of Longevity and Mortality Risk
1. Trend risk - uncertainty in future mortality improvement driven by 3 factors:
1.1 Long-term trends (changes in medical practice, society, economy, environment,
etc.)
1.2 Annual volatility (extreme weather, disease, etc.)
1.3 Correlation between long-term and annual trend volatility
2. Basis risk - uncertainty in the assumed mortality level
§ Higher uncertainty in best estimate = higher basis risk
3. Long-term underwriting risk - uncertainty in 3 factors:
3.1 Initial select period
3.2 Length of grading off period for preferred or substandard
3.3 Ultimate mortality level
Describe how to quantify the mean cost of mortality volatility
- answerLPM-157: Diversification of Longevity and Mortality Risk
Mean cost of volatility using distributable earnings =
Deterministic PV(DistEarn) - Stochastic Mean PV(DistEarn)
Mean cost of volatility using IRR =
Deterministic IRR - Stochastic Mean IRR
, Deterministic does not capture tail asymmetry (overstates expected profits)
Describe the importance of stochastic modeling when quantifying a mortality/longevity
hedge between a term product and a single premium immediate annuity - answerLPM-
157: Diversification of Longevity and Mortality Risk
‚ Combined deterministic IRR does not reflect diversification
§ « weighted average of term and SPIA IRRs
‚ Combined stochastic IRR > either standalone IRR
§ Reflects mortality/longevity hedge
‚ Stochastic analysis shows conservatism in deterministic margins
§ Can allow insurer to adjust deterministic margins based on risk appetite
Describe how to quantify diversification savings with a mortality/longevity hedge
- answerLPM-157: Diversification of Longevity and Mortality Risk
Diversification Savings =
Combined PVDE - (Standalone Term PVDE + Standalone SPIA PVDE)
‚ Diversification savings increase near the tail
‚ Increasing SPIA volume increases diversification savings
Describe 4 common GLWB product designs
- answerLPM-156: The Impact of Stochastic Volatility
Designs | Benefit Base: WBB- (t+1) | Guar. Withdrawal: W guar- (t+1)
1. No Ratchet | WBB+ (t) | x WL x P
2. Lookback Ratchet | max(WBB + (t), AV- (t+1) | x WL x WBB- (t+1)
3. Remaining WBB Ratchet | max(WBB+ (t), AV- (t+1) | W guar+ (t) + x WL x max( AV-
(t+1) - WBB+ (t), 0)
4. Performance Bonus | WBB+ (t) | x WL x P + 0.5 max( AV- (t+1) - WBB+ (t), 0)
1. No Rachet: WBB and W guar (t) are constant all years
2. Lookback Ratchet: WBB = highest AV -> allows W guar (t)
to increase
3. Remaining WBB Ratchet: Like Lookback, except WBB decrease's with withdrawals
4. Performance Bonus: WBB decrease's with withdrawals but never increases
Describe the 4 possible transitions each anniversary when modeling a VA GLWB
- answerLPM-156: The Impact of Stochastic Volatility
1. Death -> contract terminates
2. Alive, but no withdrawal
3. Alive and makes a withdrawal W(t) <= W guar- (t)
