Chapter 1 - Life insurance products [Endowment assurances]

Question 1

What are the basic customer needs met by life insurance contracts

Answer 1

• protection
• savings

Question 2

Explain “initial capital strain” in words and with a formula

Answer 2

Large costs occur at the start of the contract like marketing, underwriting, commission which cannot be recouped with the first premium. Hence negative asset share which is initial capital strain

C0 = V0 + E0 - P0

C = capital strain
V = supervisory reserves and minimum solvency margins
E= Expenses and commission
P = Premium at time 0

Question 3

What are the elements of the product cycle

7

Answer 3

• Product design
• Pricing
• Marketing/Sales
• Underwriting
• Claims management
• Experience monitoring
• Valuation

Question 4

What are the risks for endowment assurances

Answer 4

• investment risk - as endowment is savings in nature investment risk is introduced. The extent to which there is risk is on whether the contract is unit-linked, index-linked, without-profit or with-profit
• Mortality risk - depending on the death benefit offered on the contract
• Anti-selection risk - extent will depend on the actual, or perceived choice the policyholder had in effecting the contract
• Expense risk - actual marginal costs of administiring the product need to be met
• Withdrawal risk - when the asset share is negative there is a risk of withdrawal

Question 5

What factors willl affect the initial capital required to write contracts

5

Answer 5

• design of the contract
• frequency of payment of premium
• relationship between the pricing and supervisory reserving basis
• additional solvency capital requirements
• level of initial expenses

Question 6

State 3 examples of how the death benefit on a unit-linked endowment assurance may be expressed.

Also, explain the needs each option satisfies.

Answer 6

• 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.

Question 7

Discuss the capital requirements related to insurers who write endowment assurance

5

Answer 7

• 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

Question 8

State reasons why anti-selection risk for group endowment assurance may be lower than for individual contracts

Answer 8

compulsory membership requirement

restrictions on level of cover per member (salary related)