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

Compare conventional without-profits, with-profits and unit-linked products form the consumer’s point of view in terms of cost, flexibility and guarantees

Answer 3

Conventional without-profits
+high guarantees imply higher cost
+usually least flexible (to alter premiums/benefits)

With-profits
+typically lies somewhere between other two in terms of cost, guarantees and flexibility

Unit-linked
+higher/lower expected benefit/premium for given premium/benefit
+flexibility in types of levels of cover included, ability to vary premiums according to need

Question 4

Outline the key features of unit-linked contracts

Answer 4

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 5

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

Answer 5

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

Question 6

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

Answer 6

Less guarantees => likely lower risk than non-linked contracts

Nature/extent of risks 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 7

Describe risks of conventional without-profits contracts from the policyholders’ point of view

Answer 7

+Insufficient benefit…

+..made worse by inflation over time

+Insurer insolvency, unable to fully meet guaranteed benefits.

+Inflexibility of product to keep pace with
changing disposable income of policyholder

+changing amounts of benefit needed throughout financial life

\+Affordability of premiums
accident
sickness
redundancy
other loss of income

Question 8

Describe briefly a range of products that the insurer should sell

Answer 8

+Attractive range of products that maximises profits

+In the long-rum profits would be maximised when utility to customers are maximised

+the Insurer should control and diversify their risk through their business volumes and business mix.

Question 9

Describe index linked contracts

Answer 9

Benefits are guaranteed to move in line with economic performance of investment/economic index in specified contract

Single or regular premiums

Surrender value, if applicable, would normally be value of benefits calculated according to index value at time of surrender

Main risk to insurer, peculiar to these contracts, relates to investment, i.e.
being unable to invest in a way to precisely match the benefit guarantee (i.e. assets held don’t move in line with economic/investment index)