Chapter 3- South African Specific Products (Group)

Question 1

Describe a group life contract as well as the different structures of group cover? (7)

Answer 1

Group business refers to insurance where a policy is issued to a policyholder other than an individual to cover a group of persons (identified by reference to entity buying the contract)

• Examples: trade unions, professional bodies, borrowers from credit institutions, clients/ account holders of retail stores
• Employee benefits = group products sold to a group of employees
• Membership is usually compulsory

Employee benefit structures:
• Employer takes out group policy directly
• Employer establishes a retirement fund (pension or provident fund) – can offer certain risk benefits
• Umbrella funds: retirement funds that pool the retirement investments of multiple, unrelated employers into a single legal structure

Question 2

List various group risk products? (8)

Answer 2

• Death benefits (group life assurance, GLA) – member
• Spouse’s death benefit
• Spouses and children annuities
• Income protection
• Disability (lump sum)
• Critical illness (lump sum)
• Funeral benefits
• Credit life – purchased by banks / credit institutions

Question 3

Describe the features of group risk products? (10)

Answer 3

• Premiums and benefits usually expressed as % of pensionable salary
o  benefits increase in line with salary – but may be capped
• Limited choice, can only be amended at certain times or on certain life events
• Simpler to enable bulk administration
• No underwriting for cover below free cover limits
• Pre-existing conditions may be excluded for new employees joining the group
• Premium rates are determined for a group as a whole
o Not guaranteed for more than 1 year and reviewed regularly
o Based on claims experience for large groups
• More cross-subsidisation than indiv
o rates often not distinguished by gender or age
• Less administration than for multiple individual policies – to enable bulk administartion
• Continuation option (often includes)
• Income protection benefit differences
• Taxation of a group scheme depends on the tax status of the scheme
• Profit share arrangements sometimes exist where the employer shares in the underwriting profits

Question 4

Describe the features of group income protection benefits? (4)

Answer 4

• Waiting period is of similar duration to the sick leave

• First two years:
o Monthly disability income = 100% of pensionable salary
o Inability to perform one’s OWN occupation

• After two years:
o Monthly disability income = 75% of pensionable salary
o Inability to perform one’s own or a suitable ALTERNATIVE occupation
o  reassessment of disability after 24 months

• Pension fund contributions continue while claims are in payment
o Member contributions - deducted from disability benefit

Question 5

Describe the taxation of group schemes? (4)

Answer 5

• Approved scheme:
o Requirements:
 scheme must contain an element of retirement funding
 approved benefits can only cover the employee and not his family members
o  risk premiums are tax deductible while benefits are usually taxed

• Unapproved scheme:
o Risk premiums form part of taxable income but the lump sum benefit paid out is tax free

Question 6

Describe the additional risk associated with group cover? (5)

Answer 6

• Anti-selection risk is reduced where membership is compulsory

• Mortality risk is
o increased – free cover limits
o reduced – frequent premium reviews

• Concentration risk by geographical location

• Anti-selection risk associated with a continuation option. Initial pricing of benefit may underestimate:
o Take-up of option
o Experience of lives that take up the option

• Moral hazard (w.r.t income protection) where the employer might dismiss an employee on false “medical” grounds when the employee would have been dismissed anyway

• Highly competitive market in which brokers can re-broke schemes on a yearly basis  extremely tight margins
o  possible loss of business where competitors are prepared to write the business at a loss

Question 7

How can life insurance companies be involved with a pension fund? (3)

Answer 7

• Administration of pension and provident funds
• Offer investment portfolios to pension or provident funds
• Offer insurance (risk or annuity) products to pension or provident funds

Question 8

Describe the features of group pension and provident funds? (10)

Answer 8

• Benefits may be payable upon:
o Withdrawal (upon leaving employer)
o Retirement
o Insured events (e.g. death)

• Possibilities for withdrawal benefit:
o Transfer to pension / provident fund
o Transfer to new employer’s pension / provident fund
o Purchase retirement annuity
o Cash as taxable lump sum BUT under investigation by National Treasury

• Contributions are made by both employers and employees (usually)’
• Tax incentives exist for contributions
• Board of trustees in place

• DC fund: employee can choose and investment portfolio for their retirement savings
o Available funds are approved by the board of trustees

• Pension fund: two-thirds of benefit must be used to purchased annuity  only one third as cash

• Provident fund: full benefit may be taken as cash
o BUT under investigation by National Treasury
o Expect treatment of various retirement benefits will be standardised

• Regulation 28 limits the extent to which retirement funds can invest in particular assets or asset classes to protect investors from:
o Poorly diversified portfolios
o Over-exposure to higher-risk asset classes
o Complex financial instruments

Question 9

Describe the risk in group retirement products? (3)

Answer 9

• Key risk: operational risk associated with administration-intensive environment of retirement funding
o Incorrect investment of member’s contributions  potentially high losses

• Expense risks for admin
• Market risks same as before