4. Life Insurance: C, D. General Business Environment

Question 1

Insurance intermediaries

Answer 1

Independent persons whose aim is to find the best contract, in terms of benefits and premiums, for their clients.

Question 2

To sell policies through an intermediary the policies must be competitive with respect to:

Answer 2

• commission
• benefits and premiums (non-profit business)
• bonus rates (with profit business)
• past investment performance and expense charges (unitised business)
• administration

Question 3

Tied agents

Answer 3

Tied agents are “tied” to one (or sometimes several) insurance companies. They offer their clients only policies from those companies.

Question 4

Own sales force

Answer 4

Members of an own sales force will usually be employees of an insurance company and hence will sell only the products of that company.

Question 5

4 Methods of direct marketing

Answer 5

• Mail shots
• Telephone selling
• Press advertising
• Internet selling

Question 6

Mail shots

Answer 6

Letters are sent out to a specific list of names and addresses.
The letter will be an invitation for the individual to apply for a certain policy and application forms are supplied.

Question 7

Common regulatory restrictions: (10)

Answer 7

Restrict: (4)

• the types of contracts an insurer may sell
• the premium rates and charges
• the permissible underwriting
• the maximum amount of business that a company may write

Require: (3)

• companies to be authorised
• the publication of results in a prescribed format
• certain contract conditions

Regulate: (3)

• the selling of business.
• how assets can be valued
• how liabilities are valued

Question 8

Items subject to taxation: (5)

Answer 8

• company profits
• investment income
• premiums
• benefits
• expenses

Question 9

Effects of a country’s taxation rules: (4)

Answer 9

• The competitiveness of life insurance compared to other forms of savings
• This could result in the forming of subsidiaries
• The relative attractiveness to policyholders of various policies will be influenced by the relative taxation of premiums, investment returns and benefits
• If different types of life insurance companies are taxed using different methods, anomalies could result

Question 10

Typical cover areas of professional guidance given to actuaries: (3)

Answer 10

• The matters to consider when determining the suitability of the design and pricing of a new contract
• The matters to consider when determining the value of the liabilities
• The matters to consider when advising on the suitability of a distribution of surplus to with profit policyholders of shareholders.

Question 11

New Business Strain (Insurance)

Answer 11

Initial premium less initial expenses being insufficient to cover the initial reserve required.

Question 12

Conversion option

Answer 12

Usually on term assurance, a conversion option allows you to convert the policy, with no fresh evidence of health, to an endowment or whole life policy for the same sum insured.

Question 13

Guaranteed insurability option

Answer 13

An option that enables you to effect an additional policy - often the same type as the original - with no fresh evidence of health at various times in the future.

Question 14

Tax positions can change as a result of changes in:

Answer 14

• The composition of the types of business, which can affect the basis of calculation of the tax payable,
• The rates of tax imposed by the government of the day
• The basis of taxation of life insurance companies

Question 15

Means of reducing risk

Answer 15

• Policy design. (Most effective)
• Underwriting
• Reinsurance
• Prudent pricing
• Profit/loss sharing through, for example, bonuses declared on with-profit business
• Remove/reduce guarantees/options offered
• Prudent investment
• Managing expenses
• Not offering a particular contract

Question 16

Valuation

Answer 16

The process whereby a life assurance company places a value on its assets and liabilities.

Question 17

Valuations can be carried out to: (4)

Answer 17

• Determine if a company is solvent
• Determine what surplus has arisen during a year
• Determine how much surplus can be distributed to with profit policyholders and shareholders
• Determine an appropriate level of charges for unit-linked business.

Question 18

Long term business fund

Answer 18

The sum of all the accumulated amounts of level premiums in order to meet claims in the future.
The part of the excess (payments minus claims) in the early years that is to be retained by the life company in order to meet its future commitments under these policies.

Question 19

Name the risks life insurance companies face: (9)

Answer 19

1. Mortality
2. Morbidity
3. Investment Performance
4. Expenses and inflation
5. Types and volumes of new business
6. Withdrawals
7. Guarantees
8. Options
9. Taxation

Question 20

Explain morbidity as a risk

Answer 20

If the policy provides a benefit payable upon sickness or disability. The risks the company faces are:

• the risk of occurrence of sickness or disability
• if the benefit is payable while the policyholder remains sick or disabled: the likely duration of that incapacity

Question 21

Changes in MORTALITY experience can result from: (4)

Answer 21

• developments in medical science
• “new” diseases such as AIDS
• changes in underwriting policy or standards
• changes in marketing methods and target market

Question 22

Changes in MORBIDITY experience can result from: (5)

Answer 22

• the attitude of claimants
• the general economic climate
• claims management policy
• the level of net income of the policyholder
• the employment situation of the policyholder together with the factors affecting mortality

Question 23

Explain types and volumes of new business s a risk:

Answer 23

• When a company writes new business, it will experience new business strain. The financing of the new business strain may result in a serious reduction in the size of the company’s available resources. Therefore, the rate of expansion of the business is a risk.
• When pricing a contract, your may have to assume an average policy size. (There is a risk that the actual average policy size of the business turns out to be less than what you had assumed.)
• The expected volumes of new business will influence the “per policy” expenses that the company will load for when pricing its products. (There us a risk that these volumes are lower than assumed.)

Question 24

Explain 2 types of withdrawals as a risk for life insurance companies:

Answer 24

1. At early durations: All of the initial expenses will not have been recouped, resulting in a loss.
2. Selective withdrawals: It is people in better than average health who withdraw from life insurance contracts. As the company loses the low mortality lives, the subsequent mortality of the remainder will be heavier than originally expected.

Question 25

Explain guarantees as a risk:

Answer 25

Always assume that if a guarantee forms part of the policy benefits, those policyholders who will benefit most will invoke it at the worst possible time for the company.

Question 26

Types of options you get in life insurance: (2)

Answer 26

1. Conversion options, extension options and guaranteed benefit options.
2. Flexible maturity dates, which are termed investment options.

Question 27

Why are options a risk for an insurance company?

Answer 27

You would expect the mortality of the lives exercising either of the types of options to be heavier than that of those not exercising the option.

Question 28

What are the liabilities of a life insurance company?

Answer 28

The benefits it has contractually agreed to pay out to its policyholders.