Ch 1: Life ins prods - Endowment

Question 1

Summary Card

Answer 1

• Endowment assurance
• Capital requirements

Useful accronyms:

• FISCR (Five Issues Surrounding Capital Requirements)

Question 2

Describe an endowment contract (6, 5 additional subpoints)
Def, MCN, Ben/Opt, GV

Answer 2

1. Pays benefit on survival to known date (savings need) PE
   
   • retirement lump sum, repay capital on interest only loan
2. May also pay death benefit during term (protection need) EA
3. Can be used to transfer wealth
4. Normally has surrender value.
   
   • Usually increases over time
   • Not necessarily related to sum assured
5. Can have a paid up value
6. Group version exists
   
   • e.g. by employers as part of remuneration package
   • e.g. retirement benefits, or death-in-service benefit

Question 3

Describe the forms under which endowment assurances can be written (3)

Answer 3

In all cases, product can be paid for either with single premium or regular premiums.

1. Without-profits
   
   • benefit is a guaranteed sum assured
   • typically paid on survival, can be death benefit added
2. With-profits
   
   • benefit increases over time with bonuses declared by insurer
   • or reduction in premiums
3. Unit-linked
   
   • premiums pooled into collective investment fund
   • benefit depends on investment performance, fees
   • benefit is versatile: fixed sum assured, bid value of units, % of units
   • surrender value
     
     • based on unit value
     • may be reduce by some surrender penalty by insurer

Question 4

State 3 examples of how the death benefit on a unit-linked endowment assurance may be expressed to meet different needs

Answer 4

1. fixed monetary amount
2. Bid value of units
3. some percentage (e.g. 120%) of value of units.

• If (1) is chosen, with very high sum assured (relative to premium), then policy can be almost entirely protection.
• With (2) or (3), emphasis would be on savings.
• All 3 versions commonly found in practice, as used to meet different needs.

Question 5

Discuss the risks to an insurance company that arise from endowment assurances

( 6 risks, 2, 3, 2, 2, 2, 1)

Answer 5

1. Investment risk
   
   • savings benefits have greater risk. Liab > Asset Val
   • greatest for without-profits, lower for with-profits, lowest for unit-linked
2. Mortality risk
   
   • depends on size/nature of death benefit
     *death benefit = maturity value: high at start, reduces with duration IF
   • longevity risk: more survivors = more benefits paid
3. Withdrawal risk (persistency)
   * depending on withdrawal value compared with asset share
   *AS is neg / AS is pos but < withdrawal ben = Loss
4. Expense risk
   * Tot expenses > tot contribution to expenses. Marginal costing pricing.
   * Risks because of: inflation, inability to control expenses, lower than expected sales
5. Anti-selection
   
   • Underwriting is NB to prevent this
     *Reduced on group due to compulsory membership
6. Concentration of risk
   
   • particularly for group contracts e.g. multiple deaths of people in same area

Question 6

Define anti-selection

Answer 6

Anti-selection refers to people being more likely to take out insurance when they believe their risk is higher than insurance company has allowed for in its premiums.

Can also arise where existing policyholders have opportunity to exercise guarantee or option. Those who have most to gain from guarantee or option will be most likely to exercise it.

Question 7

State reasons why anti-selection risk for group endowment assurance may be lower than for individual contracts (3)

Answer 7

1. compulsory membership requirement
2. ‘free’ membership to those insured e.g. if employers pay premiums, expect all employees to choose to join
3. restrictions on level of cover per member (salary related)

Question 8

Define Asset share and Death Strain

Answer 8

Asset Share
* Accum prem + Inv ret - exp - ben
* Using actual CF’s and earned rates

Death Strain
*Death Ben - Reserve held
* Loss made on payout of death ben

Question 9

Discuss the capital requirements related to insurers who write endowment assurance (5)

Answer 9

Acronym: FISCR

Five Issues Surrounding Capital Requirements

1. Frequency of premium pmts
   
   • more upfront = less capital intensive
2. Initial expenses
   
   • higher initial expenses, lower AS, higher capital req if premium doesn’t increase
3. Solvency capital requirements
   
   • need assets to cover reserves + supervisory solvency capital
4. Contract design
   
   • whether contract design allows reserves/solvency cap req to remain low
   • lower initial reserves = lower initial capital requirement
   • slower increase in reserves over contract term, faster invested capital is release
5. Reserving basis (level of prudence)
   
   • reserving > pricing: prem seem insuff to meet ben + exp
     *req more capital than would be required under pricing basis