Chapter 1 Flashcards
(16 cards)
Life insurance products are designed to meet personal financial needs, and these needs vary over …
- Personal lifetime (Personal financial life cycle)
- Calendar time (General economic and commercial environment)
What needs do life insurance products meet?
- Savings (build up funds for specific needs)
- Protection (against financial consequences of death/longevity)
- Mixture of protection and savings
What can the product cycle be used for?
To identify risks and how to manage them.
What are the main elements of the product cycle?
- Design
- Price
– important that practices employed in each area of the product cycle are reflected in the premiums charged
– E.g. weaker claims management = higher premium rates - Administration
– admin systems must be able to deal with complexity of products designs - Market and sell
– influences the characteristics of lives insured - Underwrite
– will have a direct influence on the claims experience - Claims management
– will have a direct influence on the claims experience - Experience monitoring
– provides info that can be used to update the product
– impact of reserves and capital requirements should be considered in product design - Valuation
Define group business.
Any collection of individuals who combine to make a single proposal of uniform insurance cover.
How can group business be set up?
Affinity groups:
* Formed around a shared interest or common goal, to which individuals formally belong
* E.g. clubs
Employers
* Employer is the PH and employees are the insured lives
* Employers can
—- pay the whole premium on behalf on employees
—- facilitate the payroll deductions where employee pays all the costs
Is group business ST or LT?
Often considered ST and regularly reviewable.
What is NB strain?
The negative CF created in an IC’s income statement in the first year of the policy. It arises when the premium paid at the start of the contract is not sufficient to cover:
* Initial expenses
* Commission payment
* Reserves (including supervisory) or
* Additional capital requirements (SCR) that the company needs to set up at that point
What is AS?
The retrospective accumulation of:
* Past premiums
* Less expenses and cost of cover
* At the actual rate of return on the assets
What is an endowment assurance?
It is a contract to pay a benefit on:
* Survival to a known date - hence operates as a savings vehicle
* Earlier death before the date - operates as a vehicle for dependant protection
Are SVs and paid-up values offered on EAs?
Yes, the company may offer SVs and paid-up values, and it usually increases over term. It can be guaranteed or not.
What are the different forms an EA can take?
- Without-profits
- With-profits - initial sum assured expected to be enhanced by the declaration of bonuses to the PH
- UL - PH pays premium into an investment fund and benefits payable depends on the performance of the underlying assets and charges levied by the IC
To whom are EAs sold?
- To individuals and to groups.
- Group EA would enable the employer to provide retirement benefits and death in service benefits
What are the main risks for the insurer on an EA?
- Mortality risk
– Depends on the nature of the benefit provided:
a) if a significant benefit is payable on death (look at DSAR = SA - reserve) there is significant mortality risk at the start of the contract, and it reduces as DIF increases.
b) If return of premiums or fund value is provided there is little mortality risk
c) If no death benefit is provided there is longevity risk that increases with DIF (risk that fewer than expected people die)
– Anti-selection risk: the extent will depend on the actual/perceived choice of the PH
* Investment risk
– Savings nature brings investment risk
– The extent depends on whether the contract is:
a) Without-profits: greatest (everything guaranteed)
b) With-profits: lower
c) UL: lowest (risk passed back to PH)
d) Index-linked
* Expense risk
– Risk that the actual marginal risks of administering the contract are greater than assumed in the pricing
– Marginal cost: costs incurred because a policy exists
– Non-marginal costs: overheads
* Selection risk
* Withdrawal risk:
– Risk that the number of withdrawals is different than expected
– Look at the AS:
a) When negative: financial risk from withdrawal and the company will lose money even if it pays the PH nothing
b) When positive: depends on the withdrawal benefit vs AS - if withdrawal benefit > AS the company loses money
What are the risks associated with group business?
- It adds no additional risk
- Anti-selection risk likely reduces
– Membership of group may be compulsory
– Restrictions on the level of cover a member can have (salary related) - Concentration risk may arise
On what will the capital requirements depend?
- Frequency of premium payment
- Additional solvency capital requirement
- Initial expense levels (greater expenses = greater capital requirement)
- Relationship between pricing and supervisory reserving bases (stronger supervisory basis = more capital required)
- Contract design (whether the design enables reserves and solvency margin requirements to be kept low)
- Notes:
- Reinsurance
- Level of guarantees
- Whether actuarial funding or negative non-unit reserves are allowed
