Chapter 6 - Life Insurance Products

Question 1

Key Features of Life insurance products

Answer 1

• Long term in nature
• Payout can be certain
• Typically only one claim ( eg. death )
• Sold to individuals or on group basis
• Used for protection against financial impact of death , ill health or for savings

Question 2

Life Insurance products by Investment type

Answer 2

• With profit
• Without profit
• Unit Linked
• Index Linked

Question 3

Profit calculation for life insurer is :

Answer 3

Premiums
- Reinsurance Premiums
- Claims ( death , illness , withdrawal , maturity )
+ Reinsurance Claims Recoveries
- Expenses ( inital admin, recurring , termination , etc)
- Commissions ( eg. sales comm )
- Increase in provisions
- Increase cost of capital
- Tax

= Profit

Question 4

Overview of Life Products :

Answer 4

Underwriting done is usually medical underwriting to assess health

Premium set either by :
- formula
- profit testing model

Provisions are:
- usually required by law , i.e regulation
- usually based on different assumptions vs pricing , eg. more prudent

Regulation of capital levels (eg. minimum capital requirement )

Question 5

Investment strategy

Answer 5

• Medium to long term assets for medium to long term liabilities but expsure to short term assets for liquidity and immediate cashflow requirements
• Equities and Property ( riskier ) to maximise investment returns
• Assets predominantly denominated in domestic currency
• Real assets to meet inflation linked benefits
• Some derivatives to hedge guarantees and options

Strategy will be confined or restricted by :
- Regulation on what can be invested in and free asset size
- Need for Tax Efficiency
- Asset liability mismatching freedom

Question 6

Risks Faced by Life Insurer

Answer 6

• Mortality ( more deaths vs expected )
• Morbidity ( increased sickness vs expected )
• Longevity ( increased lifespan vs expected )
• Early Withdrawals prior to initial expense recovery
• Investment Risks ( poor/volatile returns , default risk )
• Too high business volume so new business strain , too low volume and not able to spread overheads
• Credit Risks ( counterparty failure )
• Operational Risks ( fraud , systems failure , regulatory changes )
• Expense risks , not met by premium loading/charges

Question 7

Life Insurer should monitor

Answer 7

• Claim Rates ( Mortality & Morbidity Rates )
• Withdrawal Rates
• Reinsurance Premiums & Recoveries
• Investment Returns
• Expenses
• Sales Volumes and Mix
• Competitor Premium Rates

Profit/Loss is broken down by a process called Analysis of Surplus

Question 8

Type of Life Insurance Products

Answer 8

Assurances:
- Whole life
- Endowment
- Term
- Pure endowment

Insurance:
- Funeral
- Critical Illness
- Long term care
- Keyperson cover
- Income protection
- Income drawdown
- Investment Bond

Annuities:
- Immediate
- Deferred

These will need to be broken down for 3 things:

1. Definition of Benefits ( paid on death , illness , maturity , surrender …..? )
2. Stakeholder needs met by product
3. Whether a group version exists

Question 9

Contract Types

Answer 9

1. Without Profit
   - Life company has no discretion over benefit payable
   - Amount will be specified in policy document
   - Guaranteed and non discretionary in nature
2. With profit
   - Customer shares in company surplus or sub fund on payout
   - Profit share at discretion of company
3. Unit linked
   - Value of units linked to value of underlying assets
   - Policyholder premium usually goes into pooled investment fund with choice of funds and their share of the fund/s is represented by units
   - Only contracts with a significant investment element are written this way
4. Index Linked
   - Investment value linked to investment/economic index
   - Premiums may move in line with this index or be fixed