1 UK Specific Products (1)

Question 1

Give a brief overview of the UK’s conventional with-profits market from an insurer’s perspective. (6)

Answer 1

1. There was a large CWP market and this was a profitable product for a long time.
2. Expectations of gradually increasing regular and terminal bonuses built up.
3. This pattern was broken with the stock market falls in 1990 and particularly 2000 onwards.
4. New business volumes fell and the fall continued even after stock market recoveries.
5. The future for CWP new business and bonus rates is uncertain.
6. There has been adverse publicity for CWP as a result of falling bonus rates and the lack of transparency.

Question 2

Summarise the main benefits and risks of CWP policies from a policyholder’s perspective. (5)

Answer 2

1. CWP can be used for savings (eg. to pay off a loan) whilst also providing life cover.
2. Smoothing is an attraction.
3. Risks are:
   
   • maturity value less than expected
   • not good value if surrendered
   • not fully understanding the nature of the policy

Question 3

Give a brief overview of the UK’s accumulating with profits market from an insurer’s perspective. (6)

Answer 3

1. The market developed in the 1990s as an alternative to CWP, eg. for greater premium flexibility in personal pensions.
2. New business has reduced in recent years due to stock market turbulence and general trend away from with profits.
3. Risks are:
   
   • same as those for CWP eg. gtees, expense, etc
   • inability to apply MVRs to the required extent
   • non-compliance and potential misselling

Question 4

List five possible types of charge on a unit-linked or unitised with profits policy. (5)

Answer 4

1. Allocation rate
2. A daily Fund Management Charge
3. Bid/offer spread
4. A policy fee
5. Charges for the cost of risk benefits eg. life cover

Question 5

Summarise the risks to an insurer of unit linked products. (4)

Answer 5

1. Expenses
2. Investment - failing to track precisely the benefit guarantee
3. Credit, counterparty and liquidity risk if the provider of an investment defaults.
4. Potential compliance and mis-selling.

Question 6

Give three examples of needs that can be met with a decreasing term assurance. (3)

Answer 6

1. To repay the balance outstanding on a repayment loan.
2. To provide a family income benefit.
3. As a seven year policy to mitigate inheritance tax on gifts.

Question 7

Give eight examples of how an insurer might protect itself against higher than expected claim costs on income protection policies. (8)

Answer 7

1. Benefit limits, eg. maximum replacement ratio to ensure incentive to return to work.
2. Initial underwriting, eg. of occupational and medical history.
3. Claims controls, eg. checking information at claim is the same as that at application.
4. Claims exclusions, eg. claims relating to alcohol abuse or self inflicted injuries.
5. Clear policy conditions, to avoid having to pay disputed claims.
6. Stricter criteria for claim eligibility (not just ability to continue own occupation).
7. If premiums are reviewable, capping potential increases to reduce the risk of anti-selective non-renewals by healthier lives.
8. Ongoing claims monitoring, eg. continuing medical certification, periodic visits, use of specialist nurses to aid rehabilitation.

Question 8

List three criteria a group IP scheme generally needs to meet in order for a higher free cover limit to be offered. (3)

Answer 8

1. An adequate number of scheme members.
2. Compulsory membership.
3. The use of an “actively at work” criterion.

Question 9

List the three groups with greatest need for IP insurance. (3)

Answer 9

1. Employers - to pass on financial responsibility for sick employees to an insurer after a limited period of invalidity.
2. The self-employed
3. Individuals who do not have cover through their employer.

Question 10

What are the three defined conditions that a critical illness policy must include in the UK? (3)

Answer 10

1. Cancer
2. Heart attack
3. Stroke

Question 11

List three additional types of cover that could be included on critical illness products. (3)

Answer 11

1. Terminal illness
2. Children’s benefit
3. Total and permanent disability (TPD)

Question 12

List four desirable features of conditions to be covered by a critical illness product. (4)

Answer 12

1. To be perceived by the public to be serious and to occur frequently.
2. Defined clearly so there is no ambiguity at the time of claim.
3. For which sufficient data is available to price the benefit.
4. Where the insurer is able to avoid anti-selection.

Question 13

List five restrictions insurers might use to avoid the risk of anti-selection in a group critical illness scheme. (5)

Answer 13

1. Applying exclusions
2. Setting free cover limits
3. Ensuring members are actively at work when cover begins
4. Setting take up rates on voluntary schemes.
5. Laying down takeover terms where the insurer accepts a scheme previously insured elsewhere.

Question 14

List five needs that are met by a critical illness policy. (5)

Answer 14

1. Medical costs can be funded, eg. when the critical illness requires surgery.
2. A mortgage or loan can be repaid when the policyholder is diagnosed.
3. Income can be provided from the lump sum via an annuity when the individual cannot work as a result of the critical illness.
4. Business partners can purchase CI policies on the lives of each other to fund buyout of a stake in the partnership when critical illness arises.
5. A change of lifestyle could be funded to improve the claimant’s health.