Chapter 1: EA

Question 1

Products typically offered in a life insurance market represents

Answer 1

Reasonably profitable risks to the insurer whilst providing useful benefits to the consumer

Question 2

A basic theme of life insurance

Answer 2

in return for one or more premiums paid by a consumer, the insurer contracts to pay benefits which are in some way contingent upon human life – payment occurs on death or survival

Question 3

Simple contracts

Answer 3

provide specified guaranteed benefits in return for the payment of specified premiums

Question 4

Simple contracts types

Answer 4

non-profit non-linked
OR
without-profit non-linked

Question 5

Surrender

Answer 5

said to occur when a policyholder fails to pay all of the premiums required under the contract, and receives a lump sum (surrender value) in compensation for the premiums paid to date

Contracts that give guaranteed (minimum) surrender values can exist.

Question 6

Surrender amount paid

Answer 6

Amount paid (at the date of surrender) would normally not be specified in the contract.

Question 7

Method used to calculate surrender amount

Answer 7

The method used to calculate the amount paid (at the date of surrender) would normally be disclosed in the policy documentation sent to the policyholders at the inception of the policy.

Question 8

Paid up

Answer 8

Usually possible for the policy to continue, without paying any more premiums, but for a reduced benefit amount.

Question 9

What happens when a policyholder stops paying their contractual premiums

Answer 9

Surrender
OR
Paid up

Question 10

Lapse

Answer 10

Some policies do not pay any benefits if premiums cease before the contractual time

Question 11

Withdrawal

Answer 11

Lapse & surrender

Question 12

Basic customer needs met by life insurance contracts

Answer 12

Protection - people (and their dependents) from the financial consequences of unwelcome events (such as death)
OR
Savings - Investments, allowing the policyholder to build up funds for specific things namely:
- income in retirement
- Repayment of loan
Just a lump sum to spend as the policyholder wishes
OR
Mixture of savings and protection

Question 13

Micro risk

Answer 13

One part of the overall risk picture

Question 14

Initial capital strain

Answer 14

combination of the initial cash outflow, any prudence in the reserves and the need to establish a required solvency margin means that money has to be found initially in order to write the business

OR

The excess of the supervisory reserve and required solvency capital over the asset share on day 0+
time 0+ =the point immediately after the policy has been issued, after the first premium has been paid, and all the initial expenses have been incurred

Question 15

When should risked posed to the insurer and mitigating measures be considered?

Answer 15

At the product design stage

Question 16

Product cycle

Answer 16

Can be used to identify possible risks for the particular product and feasible techniques to manage these risks.

Question 17

Product cycle areas

Answer 17

Pricing, underwriting, management, marketing & sales, experience monitoring and valuations

Within an organisation make an important contribution to the experience that emerges.

Question 18

Product design

Answer 18

The product features (eg events covered) are determined as part of product design in the product cycle.

Considered at the product design stage:
- The needs of customers that the product aims to meet,
- risks to the insurer,
- distribution methods and marketing and
- designing administration systems and pricing

The design of the product will be adjusted based on:
- results from the pricing exercises and
- results from risk identification exercises and
- input from:
– marketing department
– sales department
– administration department.

Question 19

Pricing

Answer 19

imperative that the practices employed by each area of the product cycle are reflected in the premiums charged

E.G.
weaker claims management should be reflected in higher premium rates

Question 20

Administration

Answer 20

Policy and claims files must be maintained by the insurer.
Administration systems must be able to cope with the complexity of the product designs.

For example:
IP and LTCI policies
the system must be able to make regular claims payments, and record a lot of information about each claim.
An obvious example is that the system should not only be able to record the date a claim starts, but also the reason for the claim, the date it ceased, and why.

Question 21

Marketing and Sales

Answer 21

may influence the characteristics (and thus the risk) of the lives insured.

The insurer will also need to consider the:
- appropriate distribution method
- the costs of marketing the product
- the costs of selling the product

Question 22

Underwriting and claims management

Answer 22

The rigorousness of underwriting and claims management:
will have a direct bearing on the claims experience of the product.

Onerous underwriting processes:
may have a negative impact on:
- business volumes and
- a balance is therefore required.

E.G.
Underwriting and claims management are more complex for IP and LTCI products (and possibly for CI if tiered benefits are available) than for most other life assurance products.
Both have fundamental implications for the resulting claims experience.

Question 23

Experience monitoring and valuation

Answer 23

Impact of reserves:
-the regulatory requirements for the policyholder liabilities & capital requirements should be considered when designing the product.

provides the insurer with information that can be used to update the :
- product design,
- sales processes
- claims processes,
assumptions used in the pricing or valuation of the liabilities.

Appropriate data needs to be gathered and stored in a way that facilitates analysis of this information for experience monitoring purposes.

Question 24

Group business definition

Answer 24

Any collection of individuals who combine to make a single proposal for uniform insurance cover.

Covers a number of individuals under a single policy document.

Group schemes an be set up by any affinity group but are most commonly set up by employers for their employees, in which case the employer is the policyholder even though those insured are the employees.
As part of employees overall remuneration package.

group policies may be considered to be short-term, regularly renewable products, even if they are written by a life assurance company.

Usually the collected individuals will be employees in the same company and the employer will pay for the premiums either wholly or in part.
In most cases, the employer is the policyholder and the employees are the insured.

Cover would be provided for claims that occur during the period of cover

Question 25

Group products can arise where:

Answer 25

• the employer pays the whole premium on behalf of the employees
• where the cost is shared between the two parties (the employer may pay part or all of the employee cost but the member must pay for any coverage desired for spouse or children)
• where the employer facilitates with payroll deduction but the employee pays all costs
• where the “group” is not employment based but linked to club membership (affinity groups) or credit cards.

Question 26

Term difference between individual and group products

Answer 26

Individual products: LT
Group business: ST (1 or 2 yrs)

Question 27

Endowment assurance

Answer 27

Allow policyholders to save a lump sum by a known maturity date, with the possibility of a lump sum being paid on earlier death.

May also offer surrender values or “paid-up” values, either:
- guaranteed OR
- non-guaranteed terms

May come in different forms:
- without-profits
with-profits
unit-linked

May be sold:
- individuals
- groups

Question 28

Main risks of endowment assurances

Answer 28

• Investment returns
• Expenses
• Withdrawals
• Mortality
• Anti-selection

Question 29

Endowment assurance capital requirements of the business depend crucially on:

Answer 29

• Contract design
• Premium payment frequency
• Relationship between the pricing and supervisory reserving bases
• Additional solvency capital requirements
• Level of initial expenses

Question 30

Endowment assurance - expense risk

Answer 30

Strictly, the risk is that the total actual expenses (over a period) are higher than the total contributions received towards those expenses from the charges and/or premiums received by the company.

Actual marginal costs of administering the contract need to be met.

Question 31

Marginal costs of a contract/Variable costs

Answer 31

Costs which are incurred because the policy exists.
Provided these costs would not incur if the policy was not in existence.

E.G.
Commission
Cost of postage
Telephone calls to policyholders
printing policy documents or statements

Question 32

Non-marginal costs

Answer 32

Fixed costs or overheads

E.G.
Staff-related costs

Question 33

Persistency risk

Answer 33

Risk that the number of withdrawals is different to that expected.

Withdrawals = surrenders. lapses, partial withdrawals & paid-up policies

Question 34

Withdrawal risk

Answer 34

When asset share is negative, there is a financial risk from withdrawal.

Asset share negative = company will lose money even if it pays the policyholder nothing

Asset share positive = company will lose money if the withdrawal benefit is larger than the asset share.

Question 35

Asset share

Answer 35

The asset share is the retrospective accumulation of past premiums (Including any investment return earned), less expenses and the cost of cover, at the actual rate of return on the assets. The accumulation could be carried out for a single contract or a group of contracts.

It is also referred to as the earned asset share or the retrospective earned asset share.

In the case of with-profits contracts, allowance may be made for miscellaneous profits from without profits contracts and from surrenders and lapses, and also for the cost of guarantees and any capital support provided.
Bancassurer

Question 36

Risks under group contracts

Answer 36

Adds no additional risks and any anti-selection risk is likely to be much reduced, particularly if it is compulsory for all eligible members to join the group contract.

Concentration of risk may arise.

Reduced anti-selection risks = restricted choice that individuals may have where group shcemes are concerned.

Question 37

Endowment assurance - contract design

Answer 37

Key issue:
whether the design enables reserves and solvency margin requirements to be kept low.

the lower the initial reserves = the lower the initial capital requirement