Chapter 4-Life Insurance Products (Structural Bases) Flashcards
Describe 4 bases on which life insurance products can be written
Conventional without profits
- fully guaranteed benefits, usually level regular premiums (except for immediate annuities)
With-profits conventional/accumulating
- policyholder shares in part/all of future surplus (arising under the contract or arising within the with-profits fund)
- Conventional with profits or accumulating with profits
Unit-linked:
- benefits linked directly to investment performance of specified fund
- characterised by lower level of guarantees on benefits/premiums
- greater flexibility can be used for savings and protection
Index-linked
- benefits linked to and guaranteed to move in line with performance of specified investment index/economic index
For each of the following products, suggest most likely product basis:
- term assurance
- whole life assurance
- endowment assurance
- immediate annuity
Term assurance - conventional without profits
Whole life assurance - unit-linked, or with-profits (new conventional without-profits is rare)
Endowment assurance - unit-linked or with-profits (new conventional without-profits is rare)
Immediate annuity - conventional without-profits or index-linked
What are the implications of the type of basis used for a product?
- cost of the product and risks of the product to the policyholder
- amount of flexibility that is possible in product design
- risks to the insurer (capital requirements and potential for profit)
Compare conventional without-profits, with-profits and unit-linked products form the consumer’s point of view in terms of cost, flexibility and guarantees
Conventional without-profits
- high guarantees imply higher expected cost - margins in prices to cover risk of making losses from adverse experience
- usually least flexible (to alter premiums/benefits)
- highest risk to insurer - all future losses are bourne by the company
- Possibly highest potential for profit (margins in premium)
- higher capital requirements - greater gaurantees = more prudent reserving basis and solvency capital requirement
With-profits
- typically lies somewhere between other two in terms of cost, guarantees and flexibility
Unit-linked
- higher/lower expected benefit/premium for given premium/benefit
- flexibility in types of levels of cover included
- ability to vary premiums according to need
- But higher possible cost to policyholder - has the least guarantees so insurer can pass on adverse experience to policyholder
- possibly highest potential for profit - capital efficient and high sales volumes
Outline the key features of unit-linked contracts
- Policyholders’s premiums paid into investment fund, buys units which represents a share of that fund
- Value of unit fund depends on value of assets underlying investment fund, equal to units x Unit Price
- Units priced daily
- Used for savings and protection
- Insurer deducts charges from policyholder’s unit fund
- from premium before invested - allocation rate, bid-offer spread, fixed amt per premium
- from unit funds fund - management charge, fixed regular fund charge, regular charges taken to cover risk benefits in excess of Fund Value
- Maturity value usually equal value of units
- Death benefit may exceed Fund Value.
- Surrender value is value of unit fund, possibly with surrender penalty.
- Charges to cover expenses and cost of risk benefits
State 3 main charging structures used to meet initial expenses for unit-linked policies
Initial expenses
+Can be catered for by Low Allocation Rate for a short period at Start
+Moderately Reduced Allocation Rate for a significatn part of the term
+Higher Regular Fund Management Charge - either throughout the whole term or through the issue of capital units for a short period at the start of the contract (which will be subject to a much higher fund charge)
Describe risks faced by an insurer which sells unit-linked contracts
Less guarantees => likely lower risk than non-linked contracts Nature/extent of risks influenced by nature/level of any guarantees, any marketing/legislative constraints on charges Anti-selection risk as for comparable non-linked products Selective withdrawal risk may be higher due to transparency of fees Withdrawal/persistency risk depends on asset share compared to withdrawal benefit which may not be guaranteed in amount, but its method of calculation, May also be higher due to transparency of charges. Mortality and Investment risk influence by non-unit related guarantees Expense risk Influenced by the reviewability of charges as well as legislative restrictions. Significant marketing risk (due to low level of guarantees)
Describe risks of conventional without-profits contracts from the policyholders’ point of view
+Insufficient benefit… +..made worse by inflation over time +Insurer insolvency, unable to fully meet guaranteed benefits. +Inflexibility of product to keep pace with changing disposable income of policyholder +changing amounts of benefit needed throughout financial life +Affordability of premiums accident sickness redundancy other loss of income
Describe briefly a range of products that the insurer should sell
+Attractive range of products that maximises profits +In the long-rum profits would be maximised when utility to customers are maximised +the Insurer should control and diversify their risk through their business volumes and business mix.
Describe index linked contracts
Benefits are guaranteed to move in line with economic performance of investment/economic index in specified contract Single or regular premiums Surrender value, if applicable, would normally be value of benefits calculated according to index value at time of surrender Main risk to insurer, peculiar to these contracts, relates to investment, i.e. being unable to invest in a way to precisely match the benefit guarantee (i.e. assets held don’t move in line with economic/investment index)
