A brief presentation about Product Development Process in the Actuarial department in Malaysia.

1. My Presentation
Topic
Time
Date
Anantharaman Perumal
: PDP
: 1500
: 30-07-2015

2. Product Development Process
(PDP)
Product
Development
Process
A standardized stage-gate
process for SLF BU’s in Asia
to introduce a product
Some preparation
followed by 5
stages
It ensures that BUs are compliant
with and meets the objectives of
the SLF Policies and Asia standards
2

3. Preparation for New Product
• General Product Description
• The amount of money payable
• Type of coverage
3

4. Preparation for New Product
•Mortality/ Morbidity
rate
•Lapse rate
•Expense rate
•Investment rate
4

5. Preparation for New Product
• Modify the pricing model
according to benefit and
assumption
5

6. Profitability Testing
Internal Rate
of Return
Profit Margin
Value of New
Business
Breakeven
Year
Return on
Equity
New Business
Strain
6

7. Profitability Testing
Rate of growth of the project
To know the minimum rate of return for a
project
at time 0 : 1000 is paid out
at time 1 : 200 is received
at time 2 : 300 is received
For NPV = 0,
1000 = 200v + 300v 2
where v = (1+i)
7

8. Profitability Testing
Ratio of profits earned to total sales
Measures how much out of every dollar of
sales a company actually keeps in earnings
Profit Margin =
𝑃𝑉 𝑜𝑓 𝑃𝑟𝑜𝑓𝑖𝑡
PV of 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
8

9. Profitability Testing
The present value of book profits less the
present value of the cost of capital
How much value this new product is going to
add to our business
𝑃𝑉 𝑜𝑓 𝑃𝑟𝑜𝑓𝑖𝑡
A𝐹𝑌𝑃
9

10. Profitability Testing
The first year when the accumulated free
surplus turns positive
To know how long it is going to take before we
can cover the cost of proving the product
t, when the Accumulated Surplus becomes positive
10

11. Profitability Testing
Ratio of after tax book profit to the
investment
To know how efficiently the company is using
its resources
𝑃𝑉 𝑜𝑓 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
NPV of 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑
11

12. Profitability Testing
The strain created due to inadequate
premium amounts in initial years, which are
not enough to cover for the expenses
To understand that in insurance, the expenses
are front ended whereas returns are realized
over time
12
Net profit for 1st year
Premium 𝑋 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑚𝑜𝑑𝑒

13. Sensitivity Testing
• How the VNB and profit margin reacts to the changes in assumptions
Scenario VNB (%AFYP)
Change in VNB
from base
Profit Margin
Change in
profit margin
from base
Base Scenario 13.57% - 2.85%
Sensitivities
Pricing Interest Rate (PIR)
+ 1% from Base 14.13% 0.56% 2.66% -0.19%
- 1% from Base 13.00% -0.57% 3.07% 0.22%
Fund Growth Rate (FGR)
+ 1% from Base 14.18% 0.61% 3.10% 0.25%
- 1% from Base 13.03% -0.54% 2.64% -0.21%
13

14. Premium Rate Table
Premium rate are given to Product team
• Update the documents
14

15. Approvals
•-Product
Management
•-Actuarial
•-Claims
•-Compliance
•-Distribution
•-Finance
•-Investment
•-IT
•-Legal
•-Marketing
•-Underwriting
Discuss with
15

16. Stage 1: Product Proposal
Product Proposal
• Ensures that the proposal provides a solution to the needs of the
distributors, the customers, and the company
Preliminary Risk Assessment Model
• Preliminary assessment of the probability and severity of risks
• Mitigation strategies
16

17. Stage 2: Product Building and
Pricing
Product Specifications
• gives detailed product description,
benefits and feature
 Product description
 Product benefits and features
 Distribution channel
 Premium structure and policy fees
 Commission structure
 Riders to be included, if any
 General New Business and Policy
Administration rules
 Exclusions, Termination, and
other policy terms, conditions and
options
 Taxes, as applicable
 Detailed Underwriting Rules
17

18. Stage 2: Product Building and
Pricing
Pricing Report
• Describes the pricing in sufficient detail so that an competent actuary will be
able to check if good practice was followed
 Executive Summary
 Product Description
 Rates
 Pricing Assumptions
 Financial Projection Assumptions
 Product Classification
 Valuation Basis, Capital
Requirements & Core Assumptions
Sheet
 Pricing Model
 Profit Testing Results
 Sensitivity Testing 18

19. Stage 2: Product Building and
Pricing
FRAM
IT Report
Marketing Plan
Implementation
Plan
Reinsurance
Recommendation
Documents to
be submitted
19

20. Stage 3 : Peer Review and
Opinion/Approval
Reinsurance
Approval
Peer Review
& Financial
Opinion and
Marketing
Sign-off
Approvals
• Peer Review
Report
• Financial Opinion
and Marketing
Sign-off Report
20

21. Stage 4 : Implementation and
Launch
Final Marketing
Materials
CEO approval
of product
launch
Functional
Sign-off
21

22. Stage 4 : Implementation and
Launch
Functional
Sign-off
22
Items Signed-Off by
Administration & Peripheral Systems IT, Finance, Actuarial, Operations
Illustration System – Regression Test IT
Illustration System – Calculation Logic Actuarial
Illustration System – Format layout, footnotes and wordings
of the input screen and output
Marketing
Valuation System Valuation Actuary
Sales Materials/Illustrations
Legal, Compliance, Marketing, Product
Management, Actuarial
Product Design Product Management, Compliance, Marketing
Policy Contract Legal, Compliance, Actuarial
Investment Return Investments, Actuarial
ALM Head of ALM
Sales Projection Marketing, Channel Heads
Underwriting/Claims Administration/Operations Guidelines Operations
Risk Assessment & Management Actuarial, Risk Management, Compliance
Reinsurance Chief Actuary, Chief Risk Officer, Legal
Accounting – Local Statutory Reporting Finance
Accounting – IGAAP Basis Finance, Regional Accounting and Control
Treasury – Unit Pricing Treasury
Compliance with Local Regulations Compliance, Actuarial, Legal
Tax Assessment Finance
Training Schedules and Materials Training Head, Compliance
IT/Systems Actuarial, Finance, IT, Operations

23. Product Launch
23
Product
Documentation
Marketing
Collateral
Bank Negara

24. Stage 5 : Post-Launch
Monitoring and Evaluation
Quarterly
New
Business
Profitability
Review
Quarterly
Adjustable
Product
Report
Quarterly
Products
with
Guaranteed
Report
Monitoring of
Action Key Items
(Peer Review)
24

25. Summary
25
Preparation
• Product Specification
• Benefits
• Assumptions
• Profitability testing
• Sensitivity Testing
5 Stages
• Product Proposal
• Product Building and Pricing
• Peer Review and
Opinion/Approval
• Implementation and Launch
• Post-Launch Monitoring and
Evaluation

26. End of Presentation
26