Ch 2: Life ins prods - Whole life, Term assurance

Question 1

Describe a whole life assurance contract

(5 points, 1,3,2,2,1)

Answer 1

1. Pays benefit on death of life insured whenever it occurs
2. Long-term protection
   
   • cover expenses after death. funeral, taxes, debts, admin
   • wealth transfer between generations. large sum at early duration
   • can be tax efficient, depending on legislation
3. Typically surrender value payable
   
   • Usually increases with increasing duration in force
   • Less common in RSA
4. Can have paid-up benefit too
   
   • Administration costs > premiums
   • Premiums paid > Sum assured
5. No group version
   
   • employer wouldn’t want to give cover after employment

Question 2

Discuss the risks to an insurance company that arise from whole life assurances

(4 risks, 2,2,3,3)

Answer 2

1. Investment risk
   
   • depending on contract design. type of contract, guarantees
   • also depends on age at entry and duration in force
2. Mortality risk
   
   • depends on age at entry into product and duration in force
   • from selective withdrawals PH in good health most likely to withdraw, leaving substandard lives (Anti-selection)
3. Withdrawal/persistency risk
   
   • depending on withdrawal ben vs asset share OR AS is neg
   • Financial risk
   • OR can be selective withdrawals
4. Expense risk
   
   • inflation risk
   • LT duration==> admin contract for longer ==> cost of admin/ben > premium
   • Prem cease @ older ages to prevent this.= cease age?

Question 3

Describe the 5 factors that affect capital requirements?

Capital = Reserves+ SCR

Answer 3

1. Contract Design
2. Premium frequency
3. Strength of pricing vs regulatory basis
4. Additional solvency capital requirements
5. Level of initial expenses

Question 4

Describe a term assurance contract

(6 points, 1,2,2,4,1,2)

Answer 4

1. Pays benefit on death of life insured within term of contract chosen at outset
2. Protection contract
   
   • at lower cost compared to endowment/whole life for same level of benefit
   • for dependants to protect against financial loss from death of life assured
3. Decreasing term assurance also gives protection
   
   • repay loan balance
   • income for children until older to look after themselves
4. Typically, no surrender value, or maturity value
   
   • losses on early withdrawals/negative asset share
   • would encourage selective withdrawals
   • relatively small asset shares
   • asset share likely to be volatile, due to impact of mortality
5. Usually no paid up value (similar reasons as no SV)
6. Group version
   
   • death benefit to employees (group life)
   • protection for credit card company (credit life)

Question 5

List 4 types of invidual term assurance contract

Answer 5

• Level
• Decreasing
• Convertible
• Renewable

Question 6

What forms can a term assurance contract take on? (4)

Answer 6

1. Unit-linked (most common form)
2. Without profits (usually)
3. With profits
4. Index-linked

Question 7

Asset shares under (level) term assurances tend to be positive for roughly the final two-thirds of the policy term.

How can the company justify not paying out at least some of this asset share when a policy withdraws at later durations?

5

Answer 7

1. The company will have made a loss on early withdrawals where the asset share would have been negative. So the company feels justified in recouping some of these withdrawal losses by making profits from later withdrawals.
2. There will be a significant selective withdrawal effect. The retained asset share can then go towards meeting the increased costs due to the higher average mortality of the remaining insured lives.
3. Asset shares are never very large on a term assurance contract, and payment of very small surrender values would not justify the cost of administering them.
4. Term assurance asset shares will tend to be quite volatile (fluctuating with claims experience each year), making any fair scale of surrender values equally volatile. This could seriously upset policyholders.
5. Even at later durations asset shares are not always positive - eg where the policy is loss-making.

Question 8

State key risks to an insurance company that arise from term assurances

(5 points, 1,2,4,1,1)

Answer 8

1. Mortality risk: #deaths higher than expected in term.
2. Anti-selection risk:
   
   • Selective withdrawals: more for individual than for group(comp mem + cover restrictions)
   • Large SA for dependents vs small premium.
3. Withdrawal/persistency risk ====> Financial risk
   
   • when asset share is negative ST/MT ( tot prem small vs benefit in ST)
   • especially as policyholders have a sense of their health as the policy terms evolves
   • Higher risk in decr TA: Ben decreases in LT incentive to lapse and re-entry
   • Can be solved with cease age. (+ prem paid, AS + faster) x2 benefit here.
4. Expense risk: same as above LT inflation, fixed prem
5. No investment risk
   
   • Fund built up is small vs SA. Inv ret small significance on value.

Question 9

Describe the capital requirements for TA

6

Answer 9

1. Usually small and depends on 5 factors
2. High MCR/SCR may lead to higher overall capital requirement.
3. Reserves are small over term
4. Initial expenses high ==> higher capital required
5. Regular premium TA ==> higher capital required
6. Stronger pricing close to Reg basis ==> lower SCR ==> lower overall capital

Question 10

Describe a convertible/renewable term assurance

(5 points, 3,3,2,1,1)

Answer 10

1. Operates as a term assurance, with the option to
   
   • renew at the end of the original contract,
   • convert to WL. usually @ specific date within term.
   • usually without requiring further medical underwriting, except AIDS test
2. Needs met
   
   • Provides low cost life cover(protection)
   • with option ro renew/convert with certainty
   • without further U/W
3. Other features
   
   • premium guarantee on renewal - @NUB premium rates as at time of conversion
   • different conversion dates (specific date, on several dates, or at any date during term)
4. Usually no surrender value before conversion (same reasons as term assurance)
5. Group version exists
   
   • continuation option on employment cessation (convertible)

Question 11

Describe the risks that exist for renewable/convertible term assurances

(4, 1,3,2,1)

Answer 11

1. Same as for term assurance.
2. But significant anti-selection risk because of option to renew/convert
   
   • Expect those in worse health to take up option
   • +Prem during term to cover these expected losses
   • Renewal expenses could be less than NUB expenses
3. Renewal > risk than conversion option
   
   • Conversion changes the premium to match risk of new contract
   • Renewal does not adjust for current risk
4. Mortality,Expense,Withdrawal, No investment risk

Question 12

Describe the capital requirements for renewable/covertible TA

4

Answer 12

1. Higher than for basic TA
2. Due to additional Reserves and SCR for the option
3. Higher reserves initially for prudence funded from higher premiums in future.
4. Higher reserves at end of term to cover cost of expected higher mort experience