Chapter 2 - Life insurance products [Whole life and term assurance]

Question 1

Describe a whole life assurance contract

Answer 1

Pays benefit on death of life insured whenever it occurs

Long-term protection
+cover funeral expenses
+wealth transfer between generations
+protection for dependants
meeting any liability to taxes arising on death
can be tax efficient, depending on legislation

Typically surrender value payable
+Usually increases with increasing duration in force
+Less common in RSA
Product design decision

Can have paid-up benefit too
+Administration costs > premiums
+Premiums paid > Sum assured

No group version
employer wouldn’t want to give cover after employment

Question 2

Discuss the risks to an insurance company that arise from whole life assurances

Answer 2

• Investment risk
  depending on contract design
  also duration in force
• Mortality risk
  depends on age at entry into product and duration in force
  from selective withdrawals (policyholders in good health most likely to withdraw, leaving substandard lives)
• Withdrawal/persistency risk
  depending on withdrawal value compared to asset share
• Expense risk
  inflation
  long term duration=> administering contract for longer and thus cost of administering > premium collected

Question 3

List 4 types of individual term assurance contract

Answer 3

• Level
• Decreasing
• Convertible
• Renewable

Question 4

State key risks to an insurance company that arise from term assurances

Answer 4

• Mortality risk
• Anti-selection risk is significantly more for individual than for group
• Withdrawal/persistency risk
  when asset share is negative
  especially as policyholders have a sense of their health as the policy terms evolves
• Expense risk

Question 5

What is the risks that exist for renewable/convertible term assurances

Answer 5

Same as for term assurance. But, in addition, there’s significant anti-selection risk because of option to renew/convert