Questions

(i) Discuss how the proposals should be prioritised. [3]

(ii) Outline the factors that the company would need to consider for a launch of

the new product under Project 1. [6]

(iii) Describe how the company would review the pricing of the product under

Project 2. [6]

(iv) Discuss how the company can manage and control its risks in Project 2. [8]

(v) Compare the two investment options under Project 3 in relation to the impact

each option would have on both the company and the defined benefit pension

scheme. [8]

(vi) Suggest the possible impact of the board's decision for both options under

Project 3 on the scheme's funding and risk position. [8]

(vii) Outline how the company could, by appointing its own doctors under Project 4,

control its benefit payments and costs

An insurance company (LifeCo) in a developed country with a high level of financial

regulation is considering selling a new product providing long-term care benefits for

individual citizens. LifeCo currently sells whole of life assurance and annuity

products.

In recent years, the country's citizens have benefitted from significant improvements

in life expectancy. Over the same period, there have been significant restrictions on

government spending. This has led to the government reducing its financial support

for meeting the costs of long-term care for its citizens. The government has indicated

that it plans to cut its funding of long-term care further in future years.

In response to the government's proposed changes in long-term care funding, LifeCo

intends launching a new long-term care product, which will be sold to people in

employment. The product will offer a range of benefits that can be chosen by the

individual. The benefits offered on the product may include:

provision of nursing care in the policyholder's own home.

cash payments to cover residential care.

placements at purpose-built care homes, with different levels of care available

depending on need.

cover for funeral costs.

Competition for this type of product is currently very low with few competitors in the

market. However, due to the reduction in government financial support for long-term

care, a number of banks are also considering entering this market and offering each of

the individual benefits listed above to their customers as standalone products.

Questions

(i) List the advisers LifeCo may need to consult in setting up the new long-term

care product. [3]

(ii) Discuss the factors LifeCo should consider before deciding to launch this new

product. [10]

(iii) Describe the roles that the regulatory authorities may have in respect of the

launch and ongoing management of LifeCo's new product. [5]

(iv) Discuss the risks that LifeCo faces from other parties that could affect the

success of LifeCo's new product. [8]

(v) Discuss how LifeCo could mitigate the risks identified in part (iv). [6]

CP12 A2021-3

(vi) Discuss the level and cover of benefits that LifeCo could offer to

policyholders who have stopped paying premiums. [4]

(vii) Outline the assumptions LifeCo would need to set for pricing this product. [6]

The government maintains and operates the railway system for the whole of a

developed country. The government is responsible for ensuring that trains run on time

and ticket prices provide customers with value for money. The train system is critical

for most customers who commute to work in the main cities in the country.

The government has the following policies for refunding customers if a train journey

is delayed or cancelled:

15-29 minutes late = 20% of the customer's ticket price refunded

30-59 minutes late = 40% of the customer's ticket price refunded

60+ minutes late or train cancelled = 100% of the customer's ticket

price refunded.

The government also maintains the roads in the country and has introduced a new

traffic charge for the country's six largest cities. The traffic charge is applied to

vehicles entering or moving within each city traffic charging zone between 8 am and

10 am and between 4 pm and 7 pm on weekdays (excluding national holidays). The

traffic charge is inflation-linked increasing each year. The government expects to

keep the traffic charge and inflation-link policy in place for at least the next 10 years.

The introduction of the new traffic charge has not been popular with citizens. Due to

the poor punctuality of the train service, the introduction of the traffic charge has had

a minimal impact on the number of vehicles entering the six largest cities.

The government is planning to outsource the maintenance of the railways to an

overseas company, with the expectation that this will significantly improve the

reliability and punctuality of trains. In addition, the government is evaluating the

following package of proposals:

Action 1 To insure the risk of the train services being delayed/cancelled: in

return for a premium, an insurance company would pay the necessary

refunds on tickets.

Action 2 To sell the future rights to the traffic charge income to a pension

scheme: in return for a one-off payment, the pension scheme would

receive all future income from the traffic charge. The government is

willing to split the rights into individual cities if more than one pension

scheme is willing to invest. The rights would be sold using a bidding

system to maximise the price.

Questions

(i) Outline the risks of Action 1 from an insurance company's viewpoint. [5]

(ii) Discuss the data an insurance company would need in order to price the

contract under Action 1, including commenting on the limitations of the data.

[10]

(iii) Discuss the factors an insurance company would need to consider (other than

the availability of data) when pricing the policy in Action 1. [12]

CP12 A2021-5

(iv) Describe the risk management tools available to an insurance company should

it offer a contract under Action 1. [7]

(v) Outline the reasons a pension scheme may want to invest in the roads where

the new traffic charge will apply. [5]

(vi) Outline the advantages and disadvantages of using a discounted cashflow

method to value the future traffic charge rights. [2]

(vii) Discuss the issues that the pension scheme will need to consider in

determining the cashflows to value the future traffic charge rights under

Action 2. [6]

(viii) Discuss the risks the pension scheme should consider before submitting a bid

under Action 2. [8]

(ix) Suggest how the government could evaluate whether the package of proposals

is a success.