Chapter 17: Actuarial funding

Question 1

Describe actuarial funding

Answer 1

Actuarial funding is a technique whereby life insurance companies can hold lower reserves for unit-linked contracts to which it can be applied, and thus can reduce new business strain.

Question 2

Main reason for actuarial funding

Answer 2

The main reason for actuarial funding is to reduce the new business strain caused when a unit-linked contract is issued.

Question 3

Actuarial funding considerations about policy surrender (2)

Answer 3

1. The surrender value must not be higher than the funded value of units held.
2. A profit will be made on surrender if the surrender value is lower than the funded value.

Question 4

The purpose of actuarial funding:

Answer 4

The purpose of actuarial funding is to reduce new business stain on (certain kinds of) unit-linked contracts.

Question 5

For what kind of product design will actuarial funding be useful?

Answer 5

1. Usually one where at least one type of unit has relatively high fund management charges, which are used primarily as a means of recouping the initial expenses.
2. The product may have a capital and accumulation unit structure, with an initial premium (or premiums) being allocated to capital units and subsequent premiums to accumulation units. The capital units would have much higher fund management charges.
3. Any design for which the regular fund management charges are raised in order to recoup the initial expenses could be appropriate.

Question 6

Condition for actuarial funding

Answer 6

For actuarial funding to be workable, we need a charging structure that has higher (than “normal”) levels of regular fund management charge.