Chapter 2 Flashcards
(20 cards)
What is a whole life assurance?
It is a contract that pays a benefit on death of the life insured, whenever that may occur.
Are SVs and paid-up values offered on whole of life insurance contracts?
Yes, but it is not market practice in SA.
What needs are met by a WOL?
- Meet death duties
- Cost of funeral
- Inheritance tax
- Repayment of an outstanding loan
- Transfer of wealth
- Dependant protection
Are group versions offered for WOL?
No. It is natural for employers to restrict cover to the period of employment.
What are the main risks for insurers under whole life insurance products?
Mortality risk
* Significant in non-linked versions of the contract
* Significance depends on age at entry and DIF
* There is anti-selection risk from selective withdrawals - insurer left with all the unhealthy lives if all the healthy lives withdraw
Expense risk
* Inflation can lead to significant expense risk for contracts of long DIF
* Risk that marginal expenses are greater than allowed for in the pricing of the contracts
Withdrawal risk
* When AS negative - financial risk from withdrawal and the company will lose money even if it pays PH nothing
* When AS positive - depends on the withdrawal benefit paid vs the AS (if withdrawal benefit > AS the company loses money)
What will determine the capital requirements for WOL products?
FAIR C
- Frequency of premium payments (single vs regular)
- Additional solvency capital requirement
- Initial expenses (significant initial expenses = large reserves required)
- Relationship between pricing and supervisory reserving bases (stronger supervisory basis = more capital)
- Contract design (whether the design enables reserves and solvency margin requirements to be kept low)
What is a term assurance?
A contract to pay a benefit on the death of the life insured within the term of the contract.
* The term is specified at outset
* The payment may be a lump sum or income for a specified period
Why do insurance companies not offer SVs on term assurances?
- It has low asset shares
- There is a cost of selective withdrawals
- They need to recoup losses on early lapses with negative asset shares by making profits on later lapses with positive asset shares
- The asset share is quite volatile; it would be difficult to devise a SV scale that would treat PHs fairly
- The AS can be negative at late durations or likely to be decreasing towards the end of the term
What is a family income benefit policy?
If an income benefit is for the outstanding term of the contract the contract is effectively a form of a decreasing TA, to provide income for dependants until they can provide for themselves
What needs are met by a TA?
- Protection for dependants
– where the PH is an individual, it can provide protection against the financial loss for dependants at a lower cost than under an EA or WA for the same level of benefit
– where the PH is a corporate body or a partnership the contract can be used to provide protection against the financial loss that may arise on the death of a key person in the organisation - Funeral costs
- Repayment of outstanding balance of a loan
What are the main risks for the insurer?
Mortality risk
* Significant anti-selection risk with individual contracts (greater need for underwriting than EA of WA) and much reduced anti-selection risk for group contracts
* Significant mortality risk from selective withdrawals
Investment risk
* Not significant, since funds built up under a TA are small relative to the sum assured
* Investment return will not have a significant effect with these small funds
Expense risk
* Risk that marginal expenses are higher than expected
* Risk that overhead expenses are higher than expected and not allowed for in the expense loadings
Withdrawal risk
* AS negative for longer - high relative SA in earlier durations
* Financial incentive is greater at later stages to lapse and re-enter at a higher sum assured
* The risk of withdrawals is reduced by limiting the premium term, which increases the regular premium
– This increases the AS faster earlier on
– And it removes the financial incentive of withdrawing
Describe the capital requirements for term assurances.
The initial capital strain can arise on regular premium policies due to high initial expenses (e.g. underwriting)
Capital requirements may be high, depending on the supervisory reserving and solvency margin requirements
What is a renewable term assurance?
- A term assurance with the option to renew at the end of the original term
- The renewal can be made without further medical underwriting, unless the benefit increases
- Would expect some guarantee concerning premium rates - e.g. they will be the same as those for NB at the time the option is taken up
What is a convertible term assurance?
It allows the policyholder to convert the TA into another type of contract (EA or WA)
At what point(s) the conversion is allowed will vary depending on the policy condition
How can a term assurance contract with variations be structured?
A contract can have the option to renew, convert or both
What is the advantage of renewable and convertible term assurances?
For individuals, these contracts combine the attractions of a term assurance (low-cost cover) with:
* The certainty of being able to covert to either a permanent form of contract when it can be afforded or
* To renew the original contract for a further period of years
* All without evidence of health being provided (unless benefit level increases)
Are there group versions for renewable and convertible term assurances?
No, but there are continuation options following cessation of employment.
Are SVs offered on convertible and renewable term assurances?
Only after conversion to a permanent type of contract, e.g. a WOL or EA
What are the main risks of convertible and renewable term assurances to the insurer?
- Same risks associated with the underlying TA contract
- Existence of options, particularly renewal leads to increased anti-selection risk
Describe the capital requirements for convertible and renewable term assurances.
- It might be higher than for a basic term assurance
– Depending on the extent of additional reserve required
– Due to the additional risk and uncertainty on the insurer’s side
