Chapter 1-Life Insurance Products (Endowments) Flashcards
Define new business strain, both in words and as a formula.
In words:
New business strain arises when premium paid at start of contract, less initial expenses including any commission payments, is not sufficient to cover supervisory reserves and required solvency capital that company needs to set up at that point (moeny needs to be found initially in order to wrtie new business).
As a formula:
NUB=V_0 + E_0- P_0
V_0 = surpervisory reserves and minimum solvency margin at time 0+
E_0 = expenses and commission incurred by time 0+
P_0 = premium paid by time 0+
- Additional note:*
- asset share at time 0+ = P_0 - E_0*
- the initial cap. strain is also the excess of the supervisory reserve and required solvency capital over the asset share on day 0+*
Define anti-selection
Anti-selection refers to people being more likely to take out insurance when they believe their risk is higher than insurance company has allowed for in its premiums.
Can also arise where existing policyholders have opportunity to exercise guarantee or option. Those who have most to gain from guarantee or option will be most likely to exercise it.
Ouline the product cycle
1) Product design:
- product features
- needs of consumer
- risks to insurer
- distribution methods and marketing
- designing of admin systems
- pricing
The design of the product will be adjusted based on results from the pricing and risk identification and input from marketing and sales and admin departments
2) Pricing:
Practices employed by each area of the cycle should be refelcted in the premiums charged.
3) Administration:
- Policy and claim files
- Able to cope woth complexity of the product
4) Marketing and sales:
- influence the characteristics (risk) of the lives insured
- appropriate distribution method
- costs of marketing and selling
5) Underwriting and claims management:
- has fundamental implications on resulting claims experience
- balance - better claims experience and ease of selling
6) Experience monitoring and valuation:
- impact of reserves (regulatory requirements and capital requirements)
- informtion to update the product design, sales and claims processes, assumptions
- gathering appropriate data and storing it
Define group business and outline how it differs from individual business.
And explain where group products can arise.
Group business - any collection of individuals who combine to make a single proposal for uniform insurance cover.
Key differences:
- covers a number of individuals under a single contract
- usually employees in the same company
- written over a short period (1/2 years)
- considered short-term, regularly renewable products
- the premium paid will depend on the number (and characteristics) of the individuals covered
Can arise where:
- employer pays whole premium
- cost is shared between the 2 parties
- employer facilitates with payroll reduction but employee pays all costs
- group is not employment based but linked to a club or credit card
Describe an endowment contract (6, 5 additional sub points)
Pays benefit on survival to known date (savings need)
- retirement lump sum, repay capital on interest only loan
May also pay death benefit during term (protection need)
- Can be used to transfer wealth e.g nominate child beneficiary
Normally has surrender value.
- Usually increases over time
- Depends on contract design
- Not necessarily related to sum assured
Can have a paid up value too
Group version exists e.g. by employers as part of remuneration package e.g. retirement benefits, or death-in-service benefit
Describe the forms under which endowment assurances can be written
In all cases, product can be paid for either with single premium or regular premiums.
Without-profits
- Benefit is a guaranteed sum assured typically paid on survival, can be death benefit added
With-profits (conventional)
- benefit increases over time with bonuses declared by insurer
- bonuses can also take the form of cash payments or reduction in premium
Unit-linked
- premiums pooled into collective investment fund
- benefit depends on investment performance and fees
- Benefit is versatile, can be fixed sum assured or value of units or some % of value of units
- Surrender value based on unit value may be reduce by some surrender penalty by insurer
- Charges may be taken from premiums before they are invested or as deductions from the unit fund
State 3 examples of how the death benefit on a unit-linked endowment assurance may be expressed.
Also, explain the needs each option satisfies.
Fixed monetary amount
Bid value of units
Percentage (e.g. 120%) of Bid value of units.
If (1) is chosen, with very high sum assured (relative to premium), then policy can be almost entirely protection.
With (2) or (3), emphasis would be on savings.
All 3 versions commonly found in practice, as used to meet different needs.
List the risks to the insurer with endowments (individual)
Investment risk
Mortality risk
- possibly longevity risk
Expense risk
Withdrawal risk
Discuss the risks to an insurance company that arise from endowment assurances
Investment risk - if assets held to meet liabilities perform badly, to what extent is the company adversely affected
- depends on contract design/form
- greatest for without-profits contracts, lower for with-profits contracts, lowest for unit-linked contracts
Mortality risk
- depends on level/nature of death benefit
- big death benefit: high at start, reduces with duration IF (the sum at risk reduces as the reserve underlying the contract builds up)
- return of premiums/fund - insignificatn expect near the start
- No death benefit - longevity risk, the significance of which will increase with duration IF
- anit-selection risk associated with mortality risk, and extent will depend on the actual/perceived choice the policyholder had in effecting the contract
Withdrawal risk (persistency)
- depends on withdrawal value compared with asset share
- will be a fiancial risk when asset share is negative and will be a financial risk if surrender value is greater than the asset share
Expense risk - the total actual expenses (over a period) are higher than the total contributions received towards those expenses
- Marginal costs (e.g. administration), fixed costs (e.g salaries)
- Risks arise because of:
- inflation
- inability of management to control expenses
- lower than expected sales
Anti-selection- policyholder choice to take out contract based on own knowledge of health
- reduced anti-selection risk for group
Concentration of risk:
- particularly for group contracts e.g. multiple deaths of people in same residential area due to catastrophe
State reasons why anti-selection risk for group endowment assurance may be lower than for individual contracts
compulsory membership
requirement restrictions on level of cover per member (salary related)
List the factors that the capital requirements will depend on
- design of contract
- frequency of premium payment
- relationship between pricing and supervisory reserving bases
- additional solvency capital requirements
- level of initial expenses
Discuss the capital requirements related to insurers who write endowment assurance
Frequency of premium payments
- (more upfront = less capital intensive)
Initial expenses
- higher initial expenses increase capital requirement if premium doesn’t increase
Solvency capital requirements
- need assets to cover supervisory and required solvency capital
Contract design
- whether contract design allows reserves/solvency margin to remain low
- lower initial reserves = lower initial capital required
- slower increase in reserves = faster release of capital invested
Reserving basis (level of prudence)
- reserving basis stronger, requires more capital than would be required under pricing basis
- reserving = pricing
- reserving stonger than pricing
- reserving weaker than pricing
