Chapter 17: Actuarial Funding

Question 1

What is actuarial funding?

Answer 1

Actuarial funding is a process that allows the insurer to recognise charges in excess of those needed for recurring expenses at point of sale.

It reduces total reserves held at point of sale and hence reduces new business strain

Eliminates investment risk from the mismatch between initial expenses and charges

It should be allowed for by regulation

Question 2

What are the conditions for actuarial funding?

Answer 2

1. The policy should offer a death benefit or benefit on survival
2. There should be a surrender penalty (unit-related) which ensures that at any stage the surrender is below the actuarially funded value.
3. After actuarial funding, prudently projected future profit flows remain positive.

Question 3

What are the key ideas relating to actuarial funding

Answer 3

STENCIL MUM

Surrender penalty (there needs to be a surrender penalty that is unit related)
Takes advanced credit for future management charges so that
Expenses are better matched in nature and timing thereby reducing
New business strain
Capital and accumulation units
Investment risk is reduced
Lower unit fund initially

Management charges are high on capital units
Unit-linked policies
Mortality risk is increased

Question 4

What is the difference between non-unit reserves and actuarial funding?

Answer 4

Negative non-unit reserves
- Used for lower allocation %
- Reduces the non-unit reserves

Actuarial funding
- High fund management charge!
- Reduces the unit reserve