Ch 4: LIP 4

Question 1

Type of contract basis has implications for (unit-linked, with-profits,…

Answer 1

• Cost of the product
• Risks of the product to the PH
• Amount of flexibility possible
• Risks of the product to the insuerer

Question 2

How charges may be implemented in a unit linked contract

Answer 2

Deduct charges from the premiums before they are invested:
* Less than 100% of premiums may be allocated to units
* May be a bid-offer spread (difference between the price at which the insurer sells units and that at which the insurer buys them back)
* Fixed amount may be deducted from each premium paid

Deduct charges from the unit funds
* A % of fund vaue, taken on a regular basis
* Regular fixed charge
* Regular charges to cover risk benefits in excess of the value of the unit funds

These charges will be met by the insurer cancelling units of an equal value to the charge levied

Question 3

Key risk to insurer in unit-linked products

Answer 3

• Profit comes from the expense charges less the actual expenses and the risk charge less the cost of providing any guaranteed benefit over and above the value of the unit fund.
• Therefore the key risk is that the charges do not match the expenses or the cost of guarantee in terms of nature, timing and amount.

Question 4

Needs of consumers met through unit-linked contract

Answer 4

• Enables consumers to obtain a higher expected level of benefit for a given premium or to pay a lower expected premium for a given level benefit, than under a comparable non-linked version of a contract.

Question 5

Advantages and disadvantages of non-explicit mortality charges in unit-linked contracts

Answer 5

Advantages:
* Greater simplicity may help marketing of contract, particularly where the method of sale does not allow much explanation or the target market is not financially sophisticated
* Greater simplicity should make it less expensive to administer and so better value for the PH, which should further improve merketability, could increase profits as well.

Disadvantages
* Charges will not be sensitive to changes in sum at risk. (Fall in unit fund -> mortality cost increases , but under some circumstances the charges may actually fall and not match the costs at all.)
* If expected claim costs exceed the expected charges then the copany would have to hold some non-unit reserves to cover for the fture losses, likely to increase capital requirements.

Question 6

Marketing risk under unit-linked policies

Answer 6

• Significant marketing risk due to the higher variance of the level of benefit for a given premium, as compared with the comparable non-linked contract.
• If things turn out badly and the benefit is lower than expected, the company may suffer criticism, particularly if the PHs have not understood the risks they were facing.

Question 7

Kay aspects of a life insurance conpany’s management that affect its profitability and risk profile (11)

Answer 7

• Investment policy
• Underwriting practice
• Reinsurance strategy
• Approach to reserving and profit distribution
• Discontinuance terms offered
• Effectiveness of monitoring and feedback systems in reacting to events
• Human resources management and remuneration
• Administartion procedures, data handling and maintenance
• Capital management
• Product design
• Product princing
• Selling and marketing