C22 - Insurance DONE Flashcards
Advantages and disadvantages of insurance
+ Reduces or removes some of the risks associated with the provision of scheme benefits
+ Can leave liability with the scheme but provide a payment that is aimed at covering that liability
- Exchanging risks for guarantees leads to additional long term costs
- Not always possible to obtain insurance that exactly matched the liability either leading to excessive benefit or leaving liability
- Risk that insurer is unable to make payment
Benefits which are commonly insured
- Lump sum on death in service
- Dependants pension on death in service
- Deferred pension payments
- Immediate pension payments
How may insurers charge for group life assurance?
- Recurrent single premium basis
- Unit rate determined at inception according to age/sex distribution of employees and applied to the total sum assured, for large schemes
- Experience rating/profit sharing, for very large schemes
Define the free cover level
Amount up to which the insurer will provide life cover for individuals in the group without medical evidence (usually expressed as a max amount per individual)
Advantage/disadvantage of insurance
+ Greater predictability in the cost of benefits and timing of cashflows (particularly for smaller schemes)
- Insurer will need to charge sufficient premiums to cover its expenses and profit, as well as the actual costs of benefits paid
Why might it be particularly appropriate for small and immature schemes to insure lump sum DIS benefits?
- If the DIS benefit is it insured there is significant potential for large variability in timing and amount of annul claims
- Particularly for smaller schemes, when size of claim relative to the scheme could be large
- Removes significant liquidity risk
How is a dependants pension often insured?
Approximately, by increasing the lump sum insured
Why purchase immediate annuities?
- Smaller DB schemes and individuals retiring from DC schemes as they cannot pool mortality experience
- reduce investment and longevity risk
- terms may be competitive
Why is it unlikely for schemes to use deferred annuities to extinguish their deferred liabilities?
- May be difficult to find insurer for large bulk purchases
- Terms uncompetitive because of the cautious view for the future eg reinvestment and longevity risk
Pros and cons of with profit and unit linked annuities
+ More aggressive investment policy should give higher expected return so can benefit from better than assumed experience
- Unlikely to match benefits
- Offer lower guarantees
Factors when deciding whether or not to insure benefits
- Availability of insurance
- Certainty of the cost of the benefit
- If the cost is uncertain, how serious is it for the scheme if the cost is larger than expected?
- Cost of insurance, compared with the realistic estimate of the value of benefits
- Extra cost vs reduction in risk
- Competitive terms for admin, Actuarial services and other insurance products
Why is there a financial advantage to many small schemes in obtaining insurance?
Insurers often offer very competitive terms for admin, Actuarial services and other insurance products
Risks associated with purchasing annuities and methods of reducing these
- Disinvestment may be required at an inappropriate time, mitigated by holding assets that match those underlying the annuities and so move in line with annuity premiums
- This constrained investment strategy may cause loss of investment return, mitigated by not moving to this strategy too soon before annuity is bought
Liquidity constraints introduced or removed by insurance
Insurance of death in service lump sum reduces liquidity risk whereas the purchase of annuities may cause liquidity problems, particularly for immature or small schemes
Switching from insuring to not insuring benefits
Valuation approach may require a reserve to be held where one would not have been held before
Particularly true of dependants benefits
