Actuarial Funding

Question 1

Explain Actuarial Funding

Answer 1

The company buys fewer units than it should when premiums are received. The money that would have been used to buy the remaining units is instead used to cover initial expenses. The capital requirements of the policy are thus reduced. Going forward, the fund management charges received (that would have been used to repay the NBS) will be used to buy the missing units.

Question 2

What is the purpose of actuarial funding?

Answer 2

1) To reduce the new business strain on certain kinds of unit-linked contracts
2) To reduce the cost of capital required to issue the policy

Question 3

Fully-funded value of the unit fund at Tt

Answer 3

The amount needed should the contingent event occur - unit bid value of the units purchased by the allocated premiums

Question 4

AFF

Answer 4

Actuarial Funding Factor

The endowment assurance function at age x+t and with term n-t (Ax+t:n-t), calulated on an appropriate basis….. i.e. With some appropriate mortality assumption and i equal to the proportion of management charges we wish to pre-fund

AFF tends to 1 and t tends to n

Question 5

For what kind of product design will actuarial funding be useful?

Answer 5

1) Unit benefits are contingent upon some event e.g. Death or maturity
2) Sufficient regular fund management charges are made from the unit fund (This may be through the use of capital units and allocation units, but they are not necessary)
3) Unit-related surrender penalities apply