4. Unit- and Index-Linked Products

Question 1

Why do unit-linked contracts result in a better expected deal for the policyholder?

Answer 1

Lower guarantees than non-linked
Some investment risk passed on to ph
» Reduce margins in pricing

Question 3

Risks from writing unit-linked business

Answer 3

• Marketing from poor experience and customer dissatisfaction
• Financial risks depend on nature of guarantees given
• Withdrawal risk when asset share is negative

Question 4

How can unit-linked contracts be capital efficient?

Answer 4

• Could use charging structure and be able to take credit in supervisory reserves for future initial expense charges
• … using actuarial funding or negative non-unit reserves
• May be restricted by legislation

Question 5

Main risk for index-linked contracts

Answer 5

• Assets may not be exact match and not move in line with index

Question 6

Risks of index-linked product for customer

Answer 6

• Benefits not meeting needs
• Made worse by inflation eroding monetary value

Question 7

Features that make products attractive to customers

Answer 7

• Inflation protection
• Premium and benefit flexibility

Question 8

Purpose of products to insurer

Answer 8

• Maximise profitability for acceptable degree of risk

Question 9

Why do product designs with greatest utility to ph help insurer achieve its aims?

Answer 9

• Sell in higher volumes and/or …
  *…able to increase profit margins than less attractive designs

Question 10

Types of charges

Answer 10

• Allocation rate
• Bid-offer spread
• Admin fee (could be fixed/escalate each year)
• Policy charge or policy fee
• Fund management charge
• Risk charge
• Switch charge

Question 11

Considerations when charging renewal expenses

Answer 11

• Sufficient to match expenses incurred
• Renewal commission is % of premium&raquo_space; best match is bid-offer spread or reduced allocation
• Admin costs are fixed amount of policy and will rise each year&raquo_space; increasing fee
• Income from fund management charge may also grow as fund grows, may also be match for admin fee
• Switch charge is best for matching cost of switching between funds
• Marketing
• Simplicity
• Cross subsidies
• Market practice
• If IT cost > income&raquo_space; no IT fee

Question 12

Disclosure requirements for unit fund at inception of policy:

Answer 12

• Premium amount including frequency and rate of escalation.
• Charges, including allocation rate, asset management fees, charges for guarantees etc.
• Whether the charges are reviewable and any conditions around the reviewability of charges.
• Description of the method of the calculation of unit prices
• Length of the term of the contract
• Investment funds available. Including:
• Description of the level of risk related to investment funds, underlying asset mix, etc.
• Disclosures of projected maturity benefits with conditions on how these values are calculated and disclosed, including:
• Investment/maturity guarantees.
• Minimum benefits for risk events (e.g. death or disability), including:
• Definition of risk events, underwriting requirements, waiting periods, etc.
• Projected surrender values, including a description of the method of their calculation.
• Allowable alterations to the product including changes in premiums, partial withdrawals, changes in the term of the contract, etc.
• Initial and renewal commission payable.
• Contact details of the company.
• Regulatory requirements, e.g. contact details of an Ombud, registration details of the financial services provider.