Domande Pensions

Pensions questions

Why do the insurance company want to avoid small claims?

Arrangements where the claim amount is equal to the loss amount are unsatisfactory for the insurer, since:

• It is exposed to the risk of large claims.
• He can face small claims, which are usually high in numbers, and carry processing costs which may exceed the benefit amount.
• The insured could be careless in preventing accidents, given that the cost of a claim is fully charged to the insurer.

Small claims can be avoided through deductibles.

Franchise deductible and proportional deductible

According to a franchise (or minimum) deductible, the insurer only intervenes if the loss amount is above a given threshold, the deductible d. In this case, if the claim is higher than the deductible d, the amount reimbursed is exactly d.

A proportion α of the loss (0 ≤ α < 1) is charged to the insured under the proportional (or fixed percentage) deductible. In this case, whatever the claim is, I get only an X percentage of refund. This case isn’t in Motor Car. The insurer is willing to introduce the deductible because the process should be started for every claim. For example, for a claim of 50€ there is no sense to start a process that costs more, so they have to start the process for small claims very frequently, increasing costs. The higher the loss amount, the higher the cost charged to the insured.

Franchise deductible and fixed amount deductible

According to a fixed-amount deductible, an amount d is always charged to the policyholder. Clearly, if the loss amount is lower than d, there is no payment by the insurer. In this case, before the deductible amount, there is no reimbursement. If the amount is beyond d, I can ask for reimbursement, and this will be the loss deducted by the amount d.

Full compensation

Under the full compensation arrangement, the insurer pays in full the loss suffered by the insured or by a third party. This type of arrangement costs more and gives the highest protection available. The insurer will include the franchigia and the markup, different types of agreements. So, the claim function refers to the fact that the claim is a function of the loss and the agreement that is underlead.

Also, as concern the limit function, we start with the full compensation and we introduce the maximum, that is what the insurance must pay in the case of a big accident.

Defined benefit and defined contribution

The Defined Benefit pension plan is a traditional, older style of pension plan where workers’ retirement benefits are calculated and defined by a formula that considers:

• The years of service at the company
• The salary history

It can be a fixed annual amount or, more commonly, a proportion of the member’s salary prior to retirement. The proportion depends on the number of working years, while the salary prior to retirement can be the salary received in the last year prior to retirement or an average of the salary received in each number of years prior to retirement.

Talking about DB, we need to also consider the projected benefit obligation, which is an actuarial measurement of what a company will need at the present time to cover future pension liabilities. It is used to determine how much must be paid into a DB pension plan to satisfy all pension entitlements that have been earned by employees up to that date, adjusted for expected future salary increase. PBO assumes that the doesn’t end in the foreseeable future and is adjusted to reflect expected compensation in the years ahead. It considers a lot of factors, including:

• The estimated remaining service life of employees
• Assumed salary rises
• A forecast of employee mortality rates

A defined contribution plan is a retirement plan in which employees contribute a fixed amount or a percentage of their salary in an account that is intended to fund their retirements. The company will generate added benefit to help retain. In this case, a rule is given for the calculation of the contributions. The simplest choice is to set a fixed annual amount for each member, but more often the annual individual contribution is a proportion of the member’s salary. No guarantee is naturally implied before retirement, unless ancillary benefits have been underwritten; after retirement, a guarantee is provided if the benefit consists of an immediate life annuity.

Difference between accumulation and decumulation stages

DC pension plan investment strategies have 3 stages: initial marketing stage, the accumulation stage (savings period) and the decumulation stage (post-retirement period).

To design a corrected DC pension plan, we see that:

• The decumulation stage of pension plan journey should be of most interest to the pension plans member, to allow them to discover if they have a good or not pension plan. A good pension plan must be designed from back to front, like an airline journey.
• The contribution amount and the investment strategy needed during the accumulation phase need to take into account plan member’s attitude at risk, as concern the plan member’s degree of risk aversion and the riskiness of labor income and human capital. When the risk aversion is considered, a higher level of risk aversion leads to a lower annuitization age.

So, as airline journey, pension plan will be designed from back to front, with the goal of delivering adequate targeted pension with high degree of probability.

In conclusion, DB pension plans are not as portable as DC plans, which allow a person to rollover the portion of their retirement benefits into another plan when they change jobs.

In the last 10 years, DC assets have grown by 9% and DB assets have grown by 4.8%. For the last 20 years, the growth rate of DC assets is 8% and for DB assets is 5%.

Proportional arrangements

Reinsurance arrangements can be classified according to several criteria. In particular, the classification into global reinsurance arrangements (on a portfolio basis) and individual arrangements (on a policy basis).

• Policy basis: When a reinsurance arrangement is defined on a the relevant parameters concern the individual risks (for example: the share in the quota-share reinsurance, the retained line in the surplus reinsurance).
• Portfolio basis: The parameters of reinsurance arrangements defined on a relate to quantities concerning the portfolio total payment (for example, the priority and the upper limit in the stop-loss reinsurance).

According to another criterion, reinsurance arrangements can be classified into proportional and non-proportional arrangements.

• In a proportional reinsurance arrangement, claims and premiums are divided between the cedant and the reinsurer in the ratio of their shares in the reinsurance contract. Hence, the sharing of claims is determined when the reinsurance arrangement is defined (ex. quota-share and surplus reinsurance).
• In a non-proportional reinsurance arrangement, the rule for the sharing of claims is stated when the reinsurance contract is defined, but the actual sharing of claims is determined depending on the severity of each claim, or the number of claims in the portfolio, or the total portfolio payment (ex. Catastrophe reinsurance).

Technical actuarial balance

The expected value of Y (random present value) is the actuarial value of the benefits: its calculation consists in discounting the benefits and relies on a life table and the interest rate i, which constitute the technical basis. To define the terminology used to denote cash-flows related to life insurance contracts, and the notation for the relevant actuarial values, we refer mainly to benefits, when evaluating inflows arising from periodic premiums, as well as outflows related to expenses.

The actuarial value of 1 monetary unit payable at time m if the insured (currently age x) is alive at that time, is given by:

This benefit is provided by the pure endowment insurance. The pure endowment is for a person who has age X, requires receiving 1 £ at the end of the period o m years when we will X+m age, he will receive this amount of money which is 1£ in case of survival. If he does not survive nothing is due.

1+i =