2 UK Specific Products (2)

Question 1

State the benefits typically provided by a guaranteed equity bond. (3)

Answer 1

1. The maturity benefit is the higher of the value of an equity link and a guaranteed amount.
2. The death benefit is usually guaranteed to be at least the single premium.
3. The surrender benefit would not normally be guaranteed, although use of American-style put options could allow such guarantees to be given.

Question 2

List the three components of a typical high-income bond. (3)

Answer 2

1. A temporary annuity to provide the income.
2. A zero-coupon bond to provide a minimum capital guarantee.
3. Call options to provide exposure to equity price movements.

Question 3

Give an overview of UK personal pensions. (7)

Answer 3

1. Available since 1st July 1988.
2. Mis-selling occurred with people leaving more valuable occupational schemes.
3. Could be a deferred annuity, or more likely an endowment possible with GAO.
4. Flexibility important, for premiums and retirement date.
5. Open market option exists…
6. Since 1995 income drawdown allowed as an alternative to annuity purchase.
7. From April 2015, all restrictions on the form of retirement benefits have been removed, blurring the distinction between pre and post retirement.

Question 4

Give 12 examples of investments a policyholder may choose in a SIPP. (12)

Answer 4

1. Equities (listed on UK or OS stock exchange)
2. Fixed interest, eg. gilts and corporate bonds
3. Unit trusts
4. Investment trusts
5. OEICS
6. Ethical investment funds
7. Traded endowment policies
8. Commercial property and land
9. Futures and options
10. Deposit accounts
11. Insurance company managed fund and UL funds
12. Wine, art and classic cars.

Question 5

List the seven main risks to an insurer offering personal pensions. (7)

Answer 5

1. Investment
2. Expenses
3. Persistency
4. Possible changes to premiums and retirement date
5. Adverse changes in tax and legislation
6. Any annuity component and associated longevity risk
7. Potential for mis-selling

Question 6

Summarise the charge caps that apply to stakeholder pension plans.

Answer 6

1. When introduced in 2001, charges could not exceed 1% p.a. of the fund value.
2. For plans started after 6 April 2005, the capped charge was increased to 1.5% for the first 10 years.
3. In 2017, a cap on early exit charges was introduced for all personal pension contracts for those aged 55 and over.

Question 7

Describe the three different types of income drawdown product. (3)

Answer 7

1. Capped or Limited income drawdown - GAD income limits a % of the initial fund value.
2. Flexible income drawdown - unlimited withdrawals so long as the policyholder could demonstrate sufficient alternative income.
3. Flex-Access Drawdown - Post April 2015 products, after drawdown limits on pension funds were removed .

Question 8

What are the two main risks to an employer offering a group personal pension scheme? (2)

Answer 8

1. Inability to meet the employees expectations, eg. due to poor investment returns - could hit morale!
2. The affect on employee relations if the scheme has to be replaced, or contributions reduced if the employer can no longer afford them.

Question 9

Describe impaired life annuities. (4)

Answer 9

1. These are annuities with enhanced rates for smokers, or those with other medical conditions that might shorten their lifespan.
2. For limited enhancements, rating is carried out on the basis of answers to questions on the proposal form.
3. Where life expectancy is more severely affected, extensive medical underwriting may take place to determine the enhanced annuity rate to offer.
4. Demand has significantly reduced since April 2015 after which all pension benefits can be taken in cash form.

Question 10

List six life insurance products that may be used by an occupational pensions scheme. (6)

Answer 10

1. Group Life
2. Group Income Protection
3. Group Critical Illness
4. Bulk Annuities
5. Life Insurance Savings Contracts (eg. endowments)
6. Longevity swaps

Question 11

List six benefits of a wrap account for an investor. (6)

Answer 11

1. Online availability giving access to information at any time.
2. Siimplicity
3. Easy adjustment of investment goals as income and lifestyle needs change.
4. Simple, transparent charging structure.
5. Flexibility, eg. families can organise their affairs together.
6. Tax returns are easier to complete with all investments stored in one wrap account.

Question 12

List four distinct types of GMB (Guaranteed Minimum Benefit) possible in a variable annuity. (4)

Answer 12

1. GMDB - Guaranteed Minimum Death Benefit
2. GMAB - Guaranteed Minimum Accumulation Benefit
3. GMIB - Guaranteed Minimum Income Benefit
4. GMWB - Guaranteed Minimum Withdrawal Benefit

Question 13

State the advantages and disadvantages of variable annuities for the insurer and the policyholder. (4)

Answer 13

For the insurer:
+ Profitable product
- Difficult to manage the investment risks

For the policyholder:
+ Offers an underpinning of equity-based returns and under pinning guarantees
- Charges are often high

Question 14

Describe the two main types of equity release product. (4)

Answer 14

1. Home Reversion - all or part of the home is sold for a cash lump sum, a regular income or both. The home is rented to the client until death.
2. Lifetime Mortgage - the home is mortgaged and the mortgage is repaid when the home is sold. Most offer a “no negative equity” guarantee.

Question 15

List six risks to an insurer offering equity release products. (6)

Answer 15

1. Property price falls
2. Longevity risk
3. Interest rate risk
4. Persistency risk
5. Expense risk
6. Reputational risk

Question 16

List four disadvantages to a policyholder of equity release products. (4)

Answer 16

1. Size of the estate passed to dependants is reduced.
2. The requirement to keep the house in good condition, and associated expenses.
3. It may affect income tax, eligibility for state benefits and inheritance tax.
4. The amount of income received after interest may be perceived as very low.

Question 17

State the three main respects in which the application of Sharia principles means that Takaful differs from conventional insurance. (3)

Answer 17

1. Usury (the payment of interest) is forbidden.
2. Uncertainty (Gharar) is forbidden.
3. Gambling (Maisir) is forbidden.

Question 18

Explain what is meant by microinsurance. (4)

Answer 18

1. Targeted at those that are working, but with low incomes.
2. It has limited benefits and very low premiums, for reasons of affordability.
3. It is not a product type itself, it is the fact it is targeted at low incomes.
4. It is particularly important for the developing world.