Ch 1: LIP 1 Flashcards
New business strain Def
- Large proportion of costs may occur at the start of a contract (underwriting, marketing, initial setup of computer systems, some may require commsisson)
- Further, supervisory authorities may require thet reserves be held aside to ensure company is able to meet its obligations to policyholders. (most likely on a prudent basis)
- Company may also be required to maintain min amount of assets in addition to those backing its assessment of liabilities, required solvency margin.
- In essence: initial capital strain - Initial cash outflow, prudence in reserves and need to establish required solvency margin in order to write business.
Endowment assurances Def
- Contract to pay a benefit on survival to a known date and hence operates as a savings vehicle (lump sum on retirement or means of repaying capital on an interest-only loan)
- May also provide a significant death benefit on the death of the life insured before that date and, also thus operates as a protection vehicle for dependants.
- Typically, as surrender value would be available.
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Factors to consider when describing types of life insurance products
- Needs of consumers versus objectives of insurer
- Benefits, guarantees and options that may be provided
- Main types of products issued
- Risks to the insurer
- Risks to the insured
- Capital requirements for the contract
Personal financial life cycle (indication of need sof consumers)
Ages 16-25
* May still be studying or in first job
* Likely no dependants
* Financial needs: Some support from parents; may be saving for future family needs, would like to spend as much as possible
Ages 25-35
* May have dependants
* Large debts
* Moderate income, high expenditure (kids, house, car)
* Financial needs: Loans, worried about dependants, may start saving
Ages 35-65
* Dependants older and independent.
* Debts reduce
* Income may > expenditure
* Financial needs: Save for retirement; possibly long term care; manage wealth transfer.
Ages > 65
* Few debts, much lower income
* Main risks running out of money before death
Group products can arise where: (4)
- Employer pays whole premium on behalf of employees
- Cost shared between the two parties (employer pays part or all of employee cost but member pays for cover desired for dependants)
- Employer facilitates with payroll deduction but employee pays all costs
- “Group” is not employment based but linked to club membership (affinity groups) or credit cards.
Differences between group and individual cover:
- Group covers number of individuals under a single policy document
- Group business written over a short period : 1 - 2 years.
- Group regularly renewable
Consumer needs met by Endowment Assurances
- Savings vehicle (Lump-sum on retirement)
- Means of repaying capital on a interest-only loan
- Protection vehicle (may provide benefit on death before maturity, thus method of providing protection for dependants)
Group endowment assurances (Why, pros and problems)
- Way for employer to provide savings or protection benefit as part of theri overall remuneration package.
- Provide benefits for employees at retirement or maybe also on death in service
Pros:
* Anti-selection risk is likely to be much reduced, particularly if it is compulsory for all eligible members to join the group contract.
* Or there may be restrictions on the level of cover each member can have (perhaps related to salary)
Practical problems:
* Mobility of workforce - administration becomes costly
* May result in poor surrender values for employees who leave after a short time (if contracts have to be surrendered on leaving)
* Or could result in losses for insurance company if it has to pay over-generous surrender values to employees due to legistation)
* Concentration of risk may arise (same workplace
Mortality risk for endowment assurances depends on nature of death benefit. Explain
Mortality risk will depend on the nature of the death benefit payable:
* May be significant (i.e. equal to survival benefit)
* Return of premiums or fund. (Mortlity risk insignificant, except near the start of the contract)
* No death benefit (longevity risk, increases with duration in force)
- Mortality riskis higher at the start of the contract, and will reduce as the contract duration in force increases
- The sum at risk reduces as the reserve underlying the contract builds up
- Additionally anti-selection risk may impact mortality risk.
- Extent of anti-selection risk will depend on extent of the actualor preceived choice the policyholder had in effecting the contract
Withdrawal risk for endowment assurances
- Includes surrenders, lapses but also partial withdrawals and paid-up policies
- At times when asset share is negative, there is financial risk from withdrawal. (even if it pays the PH nothing)
- At other times, the risk depends on how any withdrawal benefit paid compares with the asset share.
Capital requirements depend on:
- Design of the contract (capital efficiency)
- Frequency of payment of premium
- Relationship between pricing and supervisory reserving bases
- Additional solvency capital requirements
- Level of the initial expenses
Product cycle
- Product design (ch 20 more detail)
- Pricing
- Aministration
- Marketing and sales
- Underwriting
- Claims management
- Experience monitoring
- Valuation (impact of reserves, cap rewuirements etc.)
With-profits, how bonusses may be given
- Reversionary bonusses
- Terminal bonusses
- Reduction in future premiums
- Regular cash payments
What makes with-profit attractive?
- Premium for same sum assured is higher for with-profits contract compared to non-profit contract.
- Bu the expectation is that the final payout on maturity (incuding the bonuses to be added in future) will present a subtsantially better return on the PHs premiums
- Possibility of additional reward.
