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IAI Actuarial Core Principles · Business Management · Business and consumer needs, the industry value chain and competitive forces

A pension provider in Pune finds that retiring customers say they want a guaranteed income for life, while the provider's own board wants to limit long-term guarantee risk on its balance sheet. Which approach most appropriately reconciles the consumer need and the business need?

The most appropriate approach is a lifetime income product whose guarantees are properly priced and managed through reinsurance or hedging, with transparent charges. This meets the customer's need for secure income while keeping the provider's risk within what the board will accept.

  1. AOffer only lump-sum withdrawals and no income products
  2. BMarket a guaranteed product without regard to the cost of the guarantee
  3. CDesign a lifetime income product with guarantees priced and reinsured or hedged, with transparent chargesCorrect
  4. DTell customers that guarantees are not valued by most retirees
  5. Withdraw all pension products from the market

Explanation

The consumer need is certainty of income; the business need is controlled risk. Pricing and managing the guarantee through hedging or reinsurance, with clear charges, serves both. Lump sums ignore the consumer need and unpriced guarantees ignore the business need.

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