Chapter 17 - Actuarial Funding

Question 1

What is the aim of actuarial funding?

Answer 1

It is a technique whereby LI companies can hold lower reserves for unit linked contracts to which it can be applied, and thus can reduce new business strain

Question 2

The conditions that have to be met for actuarial funding to be used: (5)

Answer 2

1. High fund management charges should be available on at least some of the units
2. After actuarial funding, the residual non-unit cashflows mist remain positive in all future years, when projected on a prudent basis
3. Usually means that not all of the fund management charges can be actuarially funded
4. Appropriate unitrelated surrender penalty should be in place, such that the surrender value cannot be greater than the actuarially funded unit reserve value at surrender
5. The unit fund benefits must be contigent on death and (usually) on survival for a minimum period of years

Question 3

How does actuarial funding achieves its aims? (4)

Answer 3

1. Units have a relatively high level of regular fund management charge, whose purpose is normally to recoup the initial expenses over time
2. AF allows the company to take credit for these charges in advance, at the start of the policy, by holding fewer units than required to meet the face value (nominal value) of the units at that time
3. By lowering the reserves held at the start of the policy, the amount of capital required to set up those reserves is reduced, thereby reducing the initial strain
4. Subsequent annual profits are reduced due to the increases in reserves required each year to bring the reserves held back up to the nominal value of the unit fund, which it will do over a given period of years