Chapter 3 - Life insurance products [Immediate/Deferred Annuity]

Question 1

What forms (structural basis) may be used to write immediate annuity business (4)

Answer 1

• 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)

Question 2

State key risks to an insurance company that arise from immediate annuities

4

Answer 2

• 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

Question 3

Comment on the capital requirements surrounding immediate annuities

Answer 3

• Depends on relationship between reserving/pricing basis
• Capital strain if insurer needs to set up reserves and solvency margins higher than single premium received

Question 4

State the risks to an insurance company that arise from deferred annuities

Answer 4

Pre-vesting: as for endowment
* investment
* mortality
(depending on death benefit)
* withdrawal/persistency
* expenses
Post-vesting: as for immediate +annuity
* longevity
* investment
* expenses

Question 5

Comment on the capital requirements surrounding immediate annuities

Answer 5

• Capital requirements are as for an endowment assurance contract in so far as covering the lump sum benefit
• additional capital may be required to cover any guaranteed terms for coonverting between a lump sum and a pension