Chapter 3-Life Insurance Products (Annuities) Flashcards
Describe in detail the core structure of an immediate annuity contract
Pays regular benefit, provided insured alive at time of payment
Payments start immediately, no deferred period
Purchased by single premium, may actually be proceeds of another policy (e.g. endowment policy)
Customer needs
convert capital into lifetime income e.g. pension
protect level of future income
Normally no surrender value (but can be sold to secondary market in some jurisdictions)
Group version can be used by employer to provide pensions
Other features:
May be in advance or arrears
May be single, joint-life first death, last survivor
May be level or variable e.g. fixed increase or inflation link
May have guaranteed period
Can be payable for temporary periods only e.g. pay school fees
What forms (structural basis) may be used to write immediate annuity business (4)
Without-profits
With-profits
Index-linked
Unitised
insurer guarantees paying value of units, income is guaranteed in number of units, but not in monetary value (as price will value)
State key risks to an insurance company that arise from immediate annuities
Longevity risk
including rate of improvement of life expectancy
Anti-selection risk: extent depends on extent of free choice available regarding purchase
Investment risk
extent depends on extent of matching of annuity payments with suitable assets in market
shortage of appropriate securities to match/meet liabilities
Expense risk
higher than expected inflation
inability of management to manage expenses
higher than expected initial expenses when selling
Comment on the capital requirements surrounding immediate annuities
Depends on relationship between reserving/pricing basis
Capital strain if insurer needs to set up reserves and solvency margins higher than single premium received
Describe in detail the core structure of a deferred annuity contract
Pays regular benefit, provided life insured is alive at time of payment
Benefit payments start at end of deferred period,
Funded by regular or single premiums
Customer needs
Can be used to build up to pension in retirement
Lump sum instead of part/all of the annuity, meeting need for cash sum at that point (e.g. to pay home loan)
Typically surrender value payable during deferred period, but not normally once benefit starts/is in payment
Group version exists (employers for their employees)
Annuity choices as for immediate annuity i.e advance/arrears single/joint level/variable guarantee period
less flexible than endowment assurance (savings vehicle) with immediate annuity starting at maturity date
State the risks to an insurance company that arise from deferred annuities
Split into risks before and after vesting/annuity payments commence:
Pre-vesting: as for endowment investment \+mortality (depending on death benefit) \+withdrawal/persistency \+expenses Post-vesting: as for immediate +annuity \+longevity \+investment \+expenses
Additional risks if annuity conversion terms are guaranteed