Chapter 17 - Actuarial Funding Flashcards
What is actuarial funding
It is a technique whereby life insurance companies can hold lower reserves for unit-linked contracts to which it can be applied, and thus can be used to reduce new business strain
What are the two types of units that an investment fund would have
Capital units - This would attract a higher management charge. Allocated premiums would be used to buy capital units in the first few years
Accumulation units - This would attract a lower management charge than Capital units. After a few years, then premiums will be allocated to buy these units
On which kind of unit allocation will actuarial funding work?
On any kind of unit, provided there is a sizeable quantity of fund management charges to pre-fund
What is the discount rate that is used in the actuarial present value for a unit-linked endowment assurance
The discount rate can be up to (but not greater than) the rate of annual fund management charge
How is new business strain reduced by actuarial funding
What is the money ‘saved’ used for
How are the ‘missing’ unit funds acquired later
What affect does this have on the fund management charge
The company holds a smaller unit fund (reserve) at policy inception that would be expected to be bought for the given amount of premium
The money ‘saved’ is used to cover initial expenses
The ‘missing’ unit funds are then bought later on from future management chargers
The Fund management charge therefore needs to be greater than that necessary to cover the actual fund management charges
