Chapter 27: Financial product and benefit scheme risk

Question 1

Benefit risks for benefits known in advance, i.e., DB schemes, without-profit life insurance and fixed benefit general insurance policies

Answer 1

Risk of inadequate funds - because of underfunding, insolvency of a sponsor or provider of benefits,holding of investments that are not matched with liabilities and a combo of the situations

Risk of illiquid assets - assets not being available when they are required

Risk of benefit changes - contract may have changeable terms

Risk of failing to meet the beneficiary’s needs - may occur because of inflation eroding the value of benefits, beneficiary’s circumstances changing failure to pay on time

Question 2

Benefits risks for benefits not known in advance, i.e. DC scheme, with-profit and unit-linked life insurance policies

Answer 2

Investment and expense risk - Benefits may be lower because of investment return being lower than anticipated or expense charges being higher than expected

Annuity risk - Benefits will be reduced if terms of any invested vehicle are worse than anticipated

Risk of inadequate benefits -

Inflation risk -

Question 3

General benefit risks

Answer 3

default by the sponsor / provider at a time when the funds held are insufficient
default by the sponsor / provider when the funds held include loans to the sponsor / provider
failure by the sponsor to pay contributions in a timely manner
takeover of the sponsor / provider by an organisation unwilling to continue to meet benefit promises
decision by the sponsor / provider that future benefits will be reduced
inadequate communication by the sponsor / provider with beneficiaries,