C1 LI 1

Question 1

Define new business strain, both in words and as a formula.

Answer 1

New business strain – definition

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.

As a formula
NBS = V0+ + E0+ - P0+
where:
V0+ = supervisory reserves and required solvency capital at time 0+
E0+ = expenses and commission incurred by time 0+
P0+ = premium paid by time 0+

Question 2

Define anti-selection.

Answer 2

Anti-selection – definition

 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.

Question 3

Describe an endowment assurance contract.

Answer 3

Endowment assurance
 Pays benefit on survival to known date …
 … therefore a savings vehicle, eg to provide lump sum on retirement, to
repay interest-only loan
 May also provide significant benefit on death during term …
 … in this case operates also as protection vehicle
 Normally has surrender value
 Group version exists, eg for employers to provide retirement benefits

Question 4

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

Answer 4

Unit-linked endowment assurance – possible forms of death benefit
Death benefit might be:
1. fixed monetary amount
2. value of units
3. some percentage (eg 120%) of value of units.
NB 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 three versions are commonly found in practice, as used to meet different needs.

Question 5

State four risks to an insurance company that arise from endowment assurances.

Answer 5

Endowment assurances – risks to insurance company
1. Investment risk (depending on contract design: greatest for withoutprofits
contracts, lower for with-profits contracts, lowest for unit-linked contracts)
2. Mortality risk (depending on level of death benefit) including antiselection
3. Expense risk
4. Withdrawal / persistency risk (depending on withdrawal value compared
to asset share)

Question 9

State reasons why the anti-selection risk for group endowment assurance
contracts may be lower than for individual contracts.

Answer 9

Group endowment assurance
Anti-selection risk may be lower for group endowment contracts because:
 membership of group may be compulsory (eg for all employees of
company)
 membership may be free to those insured (eg if employers pay
premiums, expect all employees to choose to join)
 may be restrictions on level of cover per member (eg related to salary).

Question 10

List five factors that influence the capital requirements of a life insurance
product.

Answer 10

Influences on capital requirements
For a life insurance product, there are Five Issues Surrounding Capital Requirements:
1. Frequency of premium payments
2. Initial expenses
3. Solvency capital requirements
4. Contract design
5. Reserving basis (level of prudence).