Part 1 Flashcards
Types of charges
- Reduced allocation rate
- Bid-offer spread
- Administration fee (can be fixed/escalated each year and can be deducted from premium or UF)
- Fund management charge
- Mortality charge
- Switch charge
- Charges for other benefits
Factors to take into account when deciding on expense charges
Charge should match the expenses being incurred
- Marketing: what is the trade-off between price and sales?
- Simplicity, for administration and marketing
- Cross-subsidy: How much to subsidize small policies from big ones
New business strain and why does is arise?
Definition:
NBS occurs day 1 asset share < supervisory reserves + solvency capital required
- regular premium: AS < 0 in early years
— high expenses occurred at start of contract: commission, marketing, sales, underwriting, policy documentation - reserves + solvency capital > 0 , since ensures low prob of insurer not being able to meet future liabilities
- Single premium: implicit prudence in solvency calculation > margins for risk and profit in premium basis
Earned asset share
- accumulation of premiums paid
- less deductions
- plus allocations of miscellaneous profit
- at a suitable rate of investment return
Level of allocations and reductions and the rates of return will reflect the company’s past experience.
Key Components of earned asset share
- premiums
- investment returned earned (incl. capital gains)
- commission
- tax on investment returns and unrealised gains
- expenses
- miscellaneous profit other sources
- allowance for death and surrender claims paid
- charges for guarantees
Advantages & Disadvantages of contribution (cash dividend) method vs conventional addition to benefits for the POLICYHOLDER
Advantages:
- bonus is received straightaway vs when insured event arises (may or may not be adv depending on when money is needed)
- bonus may appear fairer
Disadvantages:
- reduced return likely due to limited deferral of distribution of surplus
- p/h may not want reduced premiums, but instead save a fixed amount (% of salary) each month
- final benefit is lower in real terms
Advantages & Disadvantages of contribution (cash dividend) method vs conventional addition to benefits for the INSURER
Advantages:
- might be attractive to policyholders
- can be marketed as new and innovative
Disadvantages
- amount of profit deferral is less, reducing investment freedom and overall returns
- cash bonuses distributed early will reduce level of funds and place constraints on investment policy
- affordable cash bonuses may saam low in relation to reversionary bonus that can be granted for the same cost
- admin is more complex and expensive
Contribution method formula
Dividend = investment profit + mortality profit + expense profit
Actual experience is derived from suitable homogenous groups of policies, so that profits can be attributed to the policies on which w=they have arisen
Some surplus may be held for contingency
Proportion held back may vary from year to year to produce a smother progression of dividend payments
Some or all of deferred surplus may be paid as terminal dividend
Surplus distribution: Additions to benefits
Method outline
** Conventional with-profits **
Surplus arising on p/h fund from interest, mortality and expenses is distributed by means of:
-
regular reversionary bonuses
Percentage (that varies gradually over time) addition to sum insured - guaranteed once added -
special reversionary bonuses
Percentage addition to SI iro one-off unusual accumulation of surplus - guaranteed once added -
terminal bonus
Addition to SI at the time of claim
Accumulating with profit (AWP)
Policy benefit takes the form of an accumulating fund of premiums
-
regular bonus
Applied as proportion of fund -
terminal bonus
Added to fund at time of claim
Common to only distribute investment profit
Accumulated benefit may have unitized structure.
BOTH TYPES
Surplus determined for homogeneous groups of policies (By products and for terminal - by duration)
Compare surplus with smoothed asset shares at maturity to determine appropriate payouts.
Surplus distribution: Additions to benefits
Adv & Disadv
Advantages:
- methods allow smoothing bonus over time
- profits can be deferred, allowing investment freedom - a high proportion of equity and property investment (more for conventional vs AWP)
- allows actuary to apply judgmental considerations
- AWP more transparent & easier to understand
Disadvantages
- Conventional is less transparent and may be difficult for policyholders to understand
- perceived inequity by p/h may be difficult to explain / justify
Surplus distribution: Contribution method
Method outline
Identifies investment, mortality and expense surplus arising on individual policies.
Actual experience based on experience of broadly homogenous group
Surplus distributed by means of:
- addition to guaranteed benefit
- reduction in premium
- cash back
- retention of surplus for eventual terminal dividend
Some discretion for smoothing profit distribution over time
Subdivision done through preset formula
Surplus distribution: Contribution method
Adv & Disadv
Surplus distribution: revalorisation method
Method outline
Investment Surplus on p/h fund is distributed to with-profits policies by increasing reserves.
Increase in reserves is effected by means of an increase in benefit - and there may also be an increase in premiums
Surplus can include mortality and expense profit, however this is considered as reward for insurance risk taken and should be distributed entirely to shareholders
Surplus distribution: revalorisation method
Advantages and disadvantages
Adv:
- objective: formula driven
- and treats all policies in the same way
Disadv:
- no profit deferral
- less investment freedom to invest in more volatile assets
What is selective withdrawal
Risk to insurer ito:
- endowment assurances
- term assurances
- immediate annuities
- form of antiselection
- those who withdraw from a contract might be expected to exhibit different mortality experience from those who remain
- to the detriment of the insurer
- insurer can allow for this in pricing and withdrawal terms, but it may not make enough allowance
Endowment
- less of a risk, since the withdrawal benefit is usually less than the death and survival benefit.
- contract is primarily for savings
Term
- risk is that those in better health withdraw
- pure protection, so more serious concern
Immediate annuities
- risk is that those withdrawing are in worse health than those who remain
- company is at risk of paying a lump sum to a p/h who was about to stop receiving pmts anyway
- average mortality of remaining annuitant could be significantly lower as a result
