Ch 1: Life ins prods - Endowment

Question 1

Summary Card

Answer 1

• Endowment assurance
• Capital requirements

Useful accronyms:

• FISCR (Five Issues Surrounding Capital Requirements)

Question 2

Describe an endowment contract (6, 5 additional subpoints)

Answer 2

1. Pays benefit on survival to known date (savings need)
   
   • retirement lump sum, repay capital on interest only loan
2. May also pay death benefit during term (protection need)
3. Can be used to transfer wealth e.g nominate child beneficiary
4. Normally has surrender value.
   
   • Usually increases over time
   • Depends on contract design
   • Not necessarily related to sum assured
5. Can have a paid up value too
6. Group version exists
   
   • e.g. by employers as part of remuneration package
   • e.g. retirement benefits, or death-in-service benefit

Question 3

Describe the forms under which endowment assurances can be written (4)

Answer 3

In all cases, product can be paid for either with single premium or regular premiums.

1. Without-profits
   
   • benefit is a guaranteed sum assured
   • typically paid on survival, can be death benefit added
   • 2. With-profits
   • benefit increases over time with bonuses declared by insurer
   • 3. Unit-linked
   • premiums pooled into collective investment fund
   • benefit depends on investment performance, fees
   • benefit is versatile, can be
     
     • fixed sum assured
     • value of units
     • some % of value of units
   • surrender value
     
     • based on unit value
     • may be reduce by some surrender penalty by insurer

Question 4

State 3 examples of how the death benefit on a unit-linked endwment assurance may be expressed

Answer 4

1. fixed monetary amount
2. value of units
3. some percentage (e.g. 120%) of 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.

Question 5

Discuss the risks to an insurance company that arise from endowment assurances

( 6 risks, 15 total subpoints)

Answer 5

1. Investment risk
   
   • depends on contract design/form
   • greatest for without-profits contracts, lower for with-profits contracts, lowest for unit-linked contracts
   • 2. Mortality risk
   • depends on level/nature of death benefit
   • big death benefit: high at start, reduces with duration IF
   • return of premiums/fund: low mortality risk, except near start
   • no death benefit: more survivors = more benefits paid
   • 3. Withdrawal risk (persistency)
   • depending on withdrawal value compared with asset share
   • 4. Expense risk
   • Marginal costs (e.g. comm), fixed costs (e.g salaries)
   • Risks arise because of
     
     • inflation
     • inability of management to control expenses
     • lower than expected sales
     • 5. Anti-selection
   • policyholder choice to take out contract based on own knowledge of health
   • 6. Concentration of risk
   • particularly for group contracts e.g. multiple deaths of people in same residential area due to catastrophe

Question 6

State reasons why anti-selection risk for group endowment assurance may be lower than for individual contracts (3)

Answer 6

1. compulsory membership requirement
2. ‘free’ membership to those insured e.g. if employers pay premums, expect all employees to choose to join
3. restrictions on level of cover per member (salary related)

Question 7

Discuss the capital requirements related to insurers who write endowment assurance (5)

Answer 7

Accronym: FISCR

Five Issues Surrounding Capital Requirements

1. Frequency of premium pmts
   
   • more upfront = less capital intensive
2. Initial expenses
   
   • higher initial expenses increase capital requirement if premium doesn’t increase
3. Solvency capital requirements
   
   • need assets to cover supervisory and required solvency capital
4. Contract design
   
   • whether contract design allows reserves/solvency margin to remain low
   • lower initial reseves = lower initial capital requirement
   • slower increase in reserves over contract term, faster invested capital is release
5. Reserving basis (level of prudence)
   
   • reserving basis stronger, requires more capital than would be required under pricing basis