Chapter 1-Life Insurance Products (Endowments) Flashcards
Define new business strain, both in words and as a formula.
In words:
New business strain arises when premium paid at start of contract, less initial expenses including any commission payments, is not sufficient to cover supervisory reserves and required solvency capital that company needs to set up at that point.
As a formula:
NUB=V_0 + E_0- P_0
Define anti-selection
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.
Describe an endowment contract (6, 5 additional sub points)
Pays benefit on survival to known date
(savings need)
retirement lump sum, repay capital on interest only loan
May also pay death benefit during term (protection need)
Can be used to transfer wealth e.g nominate child beneficiary
Normally has surrender value.
Usually increases over time
Depends on contract design
Not necessarily related to sum assured
Can have a paid up value too
Group version exists
e. g. by employers as part of remuneration package
e. g. retirement benefits, or death-in-service benefit
Describe the forms under which endowment assurances can be written
In all cases, product can be paid for either with single premium or regular premiums.
Without-profits
Benefit is a guaranteed sum assured
typically paid on survival, can be death benefit added
With-profits
benefit increases over time with bonuses declared by insurer
Unit-linked
premiums pooled into collective investment fund
benefit depends on investment performance and fees
Benefit is versatile, can be
fixed sum assured
value of units
some % of value of units
Surrender value
based on unit value
may be reduce by some surrender penalty by insurer
State 3 examples of how the death benefit on a unit-linked endowment assurance may be expressed.
Also, explain the needs each option satisfies.
Fixed monetary amount
Bid value of units
Percentage (e.g. 120%) of Bid 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.
Discuss the risks to an insurance company that arise from endowment assurances
Investment risk
depends on contract design/form
greatest for without-profits contracts, lower for with-profits contracts, lowest for unit-linked contracts
Mortality risk
depends on level/nature of death benefit
big death benefit: high at start, reduces with duration IF
Withdrawal risk (persistency) depending on withdrawal value compared with asset share
Expense risk
Marginal costs (e.g. administration), fixed costs (e.g salaries)
Risks arise because of
inflation
inability of management to control expenses
lower than expected sales
Anti-selection
policyholder choice to take out contract based on own knowledge of health
Concentration of risk
particularly for group contracts e.g. multiple deaths of people in same residential area due to catastrophe
State reasons why anti-selection risk for group endowment assurance may be lower than for individual contracts
compulsory membership requirement
restrictions on level of cover per member (salary related)
Discuss the capital requirements related to insurers who write endowment assurance
Frequency of premium payments
(more upfront = less capital intensive)
Initial expenses
higher initial expenses increase capital requirement if premium doesn’t increase
Solvency capital requirements
need assets to cover supervisory and required solvency capital
Contract design
whether contract design allows reserves/solvency margin to remain low
Reserving basis (level of prudence) reserving basis stronger, requires more capital than would be required under pricing basis
