Sensitivity Tests

Sensitivity tests serve four main purposes:

1. Understand profitability
2. Assistance with product design
3. Establish competitive position and value
4. To provide a comprehensive set of results demonstrating the impact of
changes in assumed experience

The following details the required sensitivity to be completed and included as part of the
Pricing Document.

1. Allocation rate
The following (design) sensitivity tests need to be included:
a. Agent & staff cases allocation rate: Suggested change is the reduced
commission allows an increased allocation rate less 5% in first year
b. Large Cases: Scale needs to be determined
The following (competitive) sensitivity tests need to be included:
 As per AIA with associated AIA surrender penalty scale
 As per ACE with associated ACE surrender penalty scale

2. Surrender Penalty Scales

The following (competitive and design) sensitivity tests need to be included:
 As per ACE
 As per AIA
 As per Prudential
 Scale required matching traditional product i.e.
10 year i.e. same sum assured and same premium
15 year
20 year
Whole of life product
The following (design and profitability) sensitivity tests need to be included:
 Revised surrender penalty scale is to ensure IRR is 20%, 25% for minimum
cases
 Staff cases: Suggest use lower surrender scale (Range need to be determined)
 Large premium cases use lower surrender scale (Range needs to be
determined)

3. Monthly Policy Fee

The following (design and profitability) sensitivity tests need to be included:
 No monthly policy fee
 No monthly policy fee for annual premium 10m or above
 Assume no increase in future policy fee
 Inflation rate on fee is half that experienced i.e. 3.5%

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4. Investment Management Fee
The following (design and profitability) sensitivity tests need to be included:
 Investment management fee is 1%, 1.5% or 3%
 Investment management fee is 2% for first ten years and then
1% after ten years, or
1.5% after ten years

5. Mortality Rates
The following (design and competitive) sensitivity tests need to be included for
mortality rate charged:
 Use experience plus margin of 25%
 Use ACE mortality scale
 Use AIA mortality scale
The following (profitability) sensitivity tests need to be included for mortality rate
charged:
 Increase in experience by 100% , 200% and no change in rates charged clients
 Decrease in experience by 20% and no change in rates charged to cleints

6. Switch and Partial Surrender

For simplicity not currently included in profit testing. This is conservative.
Longer term we need to add these items and allow for cost of transaction and
charge to included. Cannot be ignored for Unit Linked Products!

7. Lapse Rates
The following (design, competitive and profitability) sensitivity tests need to be
included:
 High monthly lapse rates
 Using traditional product lapse rates
 No lapse rates
 Use low followed by high i.e. 0% for first six years and then 10% thereafter
 Assume large jump to 50% / 100% surrenders after surrender penalty period
ended
 Assume when fund = total premiums paid large jump in surrender to 50% /
100% surrenders

8. TPD experience
The following (profitability) sensitivity tests need to be included:
 Experience is additional 100% & 200% of loading
 50%, 100% and 200% increase in experience

9. Actual Investment Expense

The following (profitability) sensitivity tests need to assume actual expenses are
30bps, 50bps and 150bps (assumed 100bps)

10. Actual Expenses

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 The following (design, competitive and profitability) sensitivity tests need to be
included:
Initial expenses: Increase of 50%, 100% & 200%
Decrease of 10%
Renewal expenses: Increase of 50%, 100% & 200%
As per traditional products
Assume inflation rate or 10% & 15%

11. Earned rate and credited rate

The following (design, competitive and profitability) sensitivity tests need to be
included:
 Assume no difference between earned rate and crediting rate but loyalty
payment maintained
 Loyalty payment is 2.5%, 2% of AV after every 5 years
 Interest rate of 7.5%, 8% and 11% are earned rate. Declared rate is less 0.5%
to allow for loyalty bonus
 Alternative loyalty bonuses sales as follows:
 5% in10 years and 2.5% per every five years thereafter (for both
Endowment and Whole of life)

12. Valuation basis

The following (profitability) sensitivity tests need to be included:
 Valuation basis is maximum of (surrender value plus loyalty bonus, fund) with
solvency margin in addition or portion included in fund
 Valuation basis is maximum of (Policy Account Value plus loyalty bonus,
fund) with solvency margin in addition or portion included in fund.

13. Partial withdrawal and Premium Reduction pattern

Ignore partial withdraws as can be allowed as part of increase in completed
surrenders.

Sensitivity tests for premium reduction with no other change should be 3% p.a.,
5% p.a. and 10% p.a. Due to relationship between partial withdrawals and
premium reductions. As premium reductions and surrenders are linked sensitivity
tests combining change in both surrender pattern and premium reductions should
be performed.

14. Premium Holidays

Ignore partial withdraws as can be allowed as part of increase in completed
surrenders.

15. Maximum sum assured and minimum premium

Results for profitability of different levels should be included. (Details already
supplied.)

16. Solvency margin

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 The following (profitability) sensitivity tests need to be included:
 Solvency margin is the minimum as described under legislation increased by
50%, 100%.
 No solvency margin

17. Stochastic results for the Guaranteed

The results of the cost and impact of the guarantees should be included here.

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