CH 1 - 7 (Products) Flashcards
1
Q
Major Types of Life Insurance
A
Death Oriented:
1. Assurances
2. Endowments
3. Annuities
Health Oriented:
1. Income Protection
2. Critical Illness
3. Long Term Care Insurance
2
Q
Elements of Product Structure
A
PROGNs
- Profit sharing
(without-profits, with-profits, unit-linked, index-linked) - premium Regularity
(singular vs regular) - Options and Guarantees
- Number insured
(single, joint, group) - Surrender
3
Q
Product Cycle
A
- Product design
(product features: customer needs, risks, channels, admin systems, marketing/sales,pricing) - Pricing
- Marketing and Sales
- Underwriting
(onerousness on sales vs impact on claims)
-Administration
- Experience Monitoring
(assumptions vs reality on: claims, off rates, sales) - Valuation
(regulatory requirements, policyholder liabilities, capital requirements) - Claims management
(esp. recurring/ongoing claims)
4
Q
Factors Affecting Capital Requirements
A
DARE
- Contract Design
(PROGNs + implications on the release of reserves) - Additional solvency requirements*
- Relationship between pricing and supervisory reserving bases*
- level of initial Expenses*
(*New business strain refresh:
Initial costs
+Reserves
+Capital requirements
>
Initial premium income)
5
Q
Elements to Describing a Product
A
NICS
- Need
(Savings/Protection/Mix + Product benefit + Example + Insured Risks) - Insurer risks
(good to complement with view of p/holder risks) - Capital requirements
(Design + Regulation
… DARE) - product Structure
(PROGNs)
6
Q
Examples of Group Product Structure
A
- Employer pays premium
- Employer shares premium cost
- Employer just facilitates deduction
- Non-Employer Groups
(clubs and cards)
7
Q
Endowment Assurance
A
- Need:
> Savings AND Protection
> Pays on Death or Maturity
> Examples:
Transfer of wealth,
Repayment of interest-only debt,
Retirement - Insurer Risks:
> Investment returns
(extent will depend on profit structure)
> Mortality
(depends on size of death benefit…
High Death Ben => High mort risk at beginning
No Death Ben => Greater risk of longevity
…element of anti-selection risk)
> Withdrawals
(esp. when negative asset share)
> Expenses
(inflation, inability to control expenses, sales volume issues for fixed expenses) - Capital Requirements
(May be significant: DARE) - Possible Structure
(PROGNs)
> Surrender + Paid up option often available
> Group version exists
(retirement benefits, death-in-service benefit)
> Most common profit structure:
Unit-linked or with-profits
8
Q
Whole Life Assurance
A
- Need:
>Protection
>Pays on death whenever it occurs
>Examples:
Death expenses (funeral, inheritance tax, death duties), Wealth Transfer (tax advantages) - Insurer risks
> Mortality risks
(depends on age at entry and duration in force
…incl. anti-selection + selective withdrawals)
> Investment risks
(depends on contract design and age at entry/duration in force)
> Withdrawals
(withdrawal value vs asset share,
or negative asset share)
> Expense inflation
(inflation exposure great because of long duration of administration of policy) - Capital requirements
(May be significant: DARE) - Possible structure
(PROGNs)
> Surrender value common
> Common to increase with increasing duration
> Paid up option common
> No group version
> Most common profit structure:
Unit linked or without profits
9
Q
Term Assurance
A
- Need:
> Protection
> Pays out on death within term chosen at outset
> Examples
Cheaper protection for dependents, Paying off debt, Employer life cover, Credit cards, Key person - Insurer Risks
> Mortality risk
(= MAIN RISK
…incl anti-selection + withdrawal)
> Expense risk
> Withdrawal risk
> Risk of lapse and re-entry - Capital Requirements
>depends on surpervisory reserving and solvency margin requirements
>reserves typically small, but solvency margin may be large
>options/guarantees will influence this
> DARE - Possible structure
(PROGNs)
> Decreasing version common (debt or dependents having reduced dependency over time)
> Group version common
(employer death benefit; credit card books)
> Options to renew/convert
(nice to have cheap form with certainty of the option to extend/renew)
> Group option to continue after employment
> Unlikely to be any surrender benefit/paid-up version
> Most common profit structure:
Conventional without profits
10
Q
Immediate Annuity
A
- Need
> Protection AND Savings
> Payment of regular income benefit payments for life or set period, immediately following purchase with single premium
>Fulfills need of converting capital into lifetime income
> Examples
Retirement income, Payment of school fees - Insurer risks
>Longevity risks
(= Main risk - may be affected by self-selection, improvement of life expectancy)
> Investment risk
(depends on extent of matching + asset availability)
> Expense risk
(Inflation, expense management) - Capital Requirements
> Potentially some strain through regulatory requirements for reserves/solvency margin
(Long-term liability might be demanding on capital)
> Single premium at outset counters strain impact of expenses and reserves - Possible structure
> PROGNs
> May be level or variable
> Different profit forms
> May be guaranteed period
> Single, joint, last survivor
> Usually no surrender
> Group version can exist for pensions
> in advance or arrears
> Most common profit structure:
Conventional without profits or index-linked
11
Q
Deferred Annuity
A
- Need
> Annuity with income starting at future (“vesting”) date.
> Can be purchased with single premium or regular premiums up until vesting date
> May be structured as endowment + immediate annuity
> Example: Income in retirement - Insurer Risks
> Same as endowment assurance up to vesting date
> Same as immediate annuity after vesting date
> Additional risks if guaranteed terms for conversion - Capital requirements
> Broadly similar to endowment assurances
> Guaranteed terms will require additional capital - Structure
> Lump sum alternative option
> Group form possible (retirement groups)
> Typically surrender value only available during deferred period
> Same structure options available as for immediate annuity
12
Q
Unit-Linked
A
Def:
Premiums pooled into a collective investment fund. Benefit will depend on the investment performance of this fund.
(Benefit can be value of units, % of units, guaranteed fixed amount)
- Customer Needs/Risks
> Risk and reward predominantly borne by policyholder
(short term “Bad Day” volatility risk
+ long term poor performance risk)
> Some inflation protection
> Better flexibility
(cover choices and contribution variation)
> Often subject to less underwriting
> Extent of protection vs savings (and the risks therein) will depend on the benefit structure and size of any guarantees
> Greater cost efficiency
(higher benefit for given premium expected)
> Risk of insufficient cover
(for guaranteed death benefit - likely to be in monetary terms)
> More underwriting if increased guarantee - Insurer Risks
> Overall reduced mortality/expense/investment risk
(due to reduced guarantees)
> Marketing risk
(increased uncertainty to insured)
> Anti-selection + Selective withdrawal risks
(some control through surrender penalties)
> Investment risk on non-unit related guarantees
> Expense risk if charges not reviewable or legislative constraints on charges
> Mortality risk if guarantees given or selective effects - Capital Requirements
> Dependent on structure:
Low allocation of premiums at start (higher charges)
= More capital efficient
> May be able to account for future charges if regulation permits - Structure
> Reviewability of charges influences risk levels
> Lower profit margins = cheap for customer, but still contributes to profit through volumes
> Surrender value common with surrender penalty built in
13
Q
Index-linked
A
Def:
Benefit is linked to movements of an underlying investment/economic index’s movements
- Customer Needs/Risks
> Protection against erosion relative to index
(index guarantee)
> Risk of poor returns (short term volatility +long term performance)
> Less flexible
> Increased risk of insurer insolvency (guarantees and reduced reviewability mean strain on insurer) - Insurer Risks
> Higher investment risk to insurer
(perfect matching often not attainable/affordable
– mismatching exposes insurer to more risk) - Capital requirements
> Nothing specified, but I assume similar to without profits, potentially with mismatching reserve requirements - Structure
> Reduced scope for reviewing charges
> If surrender value applicable, normally speaks to value of benefits calculated according to index value at point of surrender
14
Q
Without Profits
A
Def:
Benefit is guaranteed sum assured
- Customer Needs/Risks
> Benefit may turn out to be insufficient
> Insurer insolvency
> Inflexibility of product
(harder to maintain during financial/health/redundancy duress + can’t change benefit needed easily)
> Higher guarantees imply higher cost - Insurer Risks
> Guaranteed benefit to be met - Capital requirements
> Standard - Structure
> Reduced scope for reviewing charges
15
Q
With Profits
A
Def:
Benefits increase over time with bonuses declared by insurer. Policyholder shares in part/all of future surplus.
- Customer Needs/Risks:
> Cost, flexibility and guarantee levels will sit between WoP and unit-linked
> Some inflation protection
(dependent on nature of profit distribution)
> Risk of insurer insolvency
(less than WoP since undistributed surpluses can maintain solvency)
> Still quite inflexible (cost + benefit) - Insurer Risk
> Some (though reduced relative to without profits) risk of insurer insolvency - Capital requirements
> Standard (potentially reduced relative to w/o profits because of discretion of bonuses) - Structure
> Different bonus distribution structures
16
Q
Income Protection
A
- Need:
> Regular stream of payments made during periods of incapacity
> Meets policyholder’s need for lost income during periods of incapacity
> Pays income until insured recovers, dies or the term ends
> Complement State and Welfare contributions + Short term benefits paid by employer
> Examples
Full replacement of income, Earmarked expenses for period (e.g. loan servicing),
Rider structure to meet premiums on other policies, Locum Protection Insurance
> Exclusions:
-Unemployment
-Redundancy
-Early retirement
-Reluctance to return to work
>Certain illnesses/injuries (like attempted suicide or HIV) - Insurer risk
> Claim inception and termination rates
(incl. anti-selection + selective withdrawals)
> Moral hazard
> Mortality, expenses and investment risks
(less than other products) - Capital Requirements
> Relatively low capital requirements (chance that no claim will be paid at all)
> Argument for higher margins due to additional uncertainty on morbidity product
> DARE - Structure:
> Incapacity can be LT or ST
> Income coverage subject to limits (caps on amount; escalation can’t outpace earnings inflation)
…Replacement ratio - post-claim income vs pre-claim income (net of tax)
> Proportional/rehabilitation benefit to incentivise return to work
> Generally no surrender value
> May be commutable (provide lump sum), though generally not the case
> Linked claim period
> Increase options
(without further underwriting - life-event link)
> Group IP common
> Mostly without profits
(profit structures only for peripheral savings structure with morbidity charge) - Complexities:
> Issues around underwriting (due to past medical history or occupation)
> Definition of incapacity not always objective assessment
> Escalation rates can be different in and out of claim
