Chapter 4 - Life insurance products [Structural Bases]

Question 1

Describe 4 bases on which life insurance products can be written

Answer 1

• Conventional without profits
  guaranteed benefits, usually level regular premiums
• With-profits
  conventional/accumulating
  policyholder shares in part/all of future surplus (from within contracts, or other contracts)
• Unit-linked
  benefits linked directly to performance of specified fund, characterised by fewer guarantees on benefits/premiums
  greater flexibility
  can be used for savings and protection
• Index-linked
  benefits guaranteed to move in line with performance of specified investment index/economic index

Question 2

For each of the following products, suggest most likely product basis:

+term assurance
+whole life assurance
+endowment assurance
+immediate annuity

Answer 2

• Term assurance
  +conventional without profits
• Whole life assurance
  +unit-linked, or with-profits
  +new conventional without-profits is rare
• Endowment assurance
  +unit-linked or with-profits
  +new conventional without-profits is rare
• Immediate annuity
  +conventional without-profits or index-linked

Question 3

Outline the key features of unit-linked contracts

Answer 3

• Policyholders’s premiums paid into investment fund, buys units
• Value of unit fund depends on value of assets underlying investment fund, equal to units x Unit Price
• Used for savings and protection
• Insurer deducts charges from policyholder’s unit fund
  +from premium before invested
  allocation rate, bid-offer spread, fixed amt per premium
  +from unit funds
  fund management charge, fixed regular fund charge, regular charges taken to cover death benefits in excess of Fund Value
• Maturity value usually equal value of units
• Death benefit may exceed Fund Value.
• Surrender value is value of unit fund, possibly with surrender penalty.

Question 4

State 3 main charging structures used to meet initial expenses for unit-linked policies

Answer 4

Initial expenses
* Can be catered for by Low Allocation Rate at Start
* Moderately Reduced Allocation Rate
* Higher Regular Fund Management Charge

Question 5

Describe risks faced by an insurer which sells unit-linked contracts

8

Answer 5

• Less guarantees => likely lower risk than non-linked contracts
• Nature/extent of financial risks from investment, expenses and demographic assumptions influenced by
  nature/level of any guarantees,
  any marketing/legislative constraints on charges
• Anti-selection risk as for comparable non-linked products
• Selective withdrawal risk may be higher due to transparency of fees
• Withdrawal/persistency risk depends on
  asset share compared to withdrawal benefit
  which may not be guaranteed in amount, but its method of calculation, May also be higher due to transparency of charges.
• Mortality and Investment risk influence by non-unit related guarantees
• Expense risk
  Influenced by the reviewability of charges as well as legislative restrictions.
• Significant marketing risk (due to low level of guarantees)

Question 6

What are the risks with respect to index-linked contracts

Answer 6

• investment risk - cannot invest so as to match precisely the benefit guarantee it is giving