Chapter 4 - Life insurance products (4)

Question 1

What is without-profits

Answer 1

• Fully guaranteed benefits with usually level regular premiums

Question 2

What is with-profits

Answer 2

• The Policyholder is entitled to part or all of any future surplus which arises under the contract

Question 3

What is unit-linked

Answer 3

• A policy where the benefits are linked directly to the investment performance of a specified fund

Question 4

What is index-linked

Answer 4

• A policy where the benefits are linked directly to a specified investment index or economic index, and are guaranteed to move in line with that index

Question 5

What is the bid value of the unit fund

Answer 5

It is the amount of money that the company would pay to the policyholder on a claim under the policy

Question 6

What is the non-unit fund

Answer 6

• It is the company’s ‘other’ money.
• It is the accumulated value of all the charges the company has taken out of its unit-linked policies,
  – less the actual costs it has incurred on behalf of those contracts
  – less any distributions of profit it has made to its providers of capital
  – plus any capital injections paid in (eg to pay to set up reserves)

Question 7

What is the difference between unit fund and asset share

Answer 7

• The unit fund is a definition of the policy benefits at a point in time
• The asset share is the accumulated value of the total premiums less actual costs to the same point in time

Question 8

What is the main risk to the policyholder in the case of conventional without-profits contracts

Answer 8

• The amount of benefit provided, which is fixed and guaranteed, eventually turns out to be insufficient
• Given the long-term nature of the contracts, this risk is exacerbated by the effects of inflation over time

Question 9

What are the various ways in which the initial expenses can be paid for under unit-linked contracts

Answer 9

• Have a very low, or zero, allocation rate for a short period at the start of a contract
• Have a (Moderately) reduced allocation rate (eg 93%) for a significant part of the term of the policy
• Have a higher regular fund charge

Question 10

What are the key risks to the insurer i.t.o. Unit and non-unit funds

Answer 10

• The charges do not match the expenses
• The cost of guarantee in terms of nature, timing and amount

Question 11

What are the differences in policyholder risk for products that are index-linked as compared to unit-linked

Answer 11

• The insurer tends to have greater investment risk with index-linked products, which will increase the risk of insurer insolvency
• There is much less scope for reviewing charges for existing index-linked products, which increases insolvency risk
• Index-linked products generally have much less flexibility