Chapter 6: Life insurance products

Question 1

Key features of life insurance contracts

Answer 1

• Long term
• Typically one claim
• Claim amount may be known this certainty, or the formula for calculating it.
• Protection against the financial impact of death and illness as well as savings
• May be sold on an individual or group basis

Question 2

What is one of the key focus of contract design in life insurance

Answer 2

Profitability

Question 3

Formula for calculating profits in life insurance contracts

Answer 3

Premium + investment income and gains - expenses and commisions - claims - reserves (increase in provisions) - Increase in cost o capital - Tax

Question 4

Underwriting

Answer 4

The process by which an insurer decides the potential risk posed by a potential policyholder

Question 5

How are premiums set in the life insurance space

Answer 5

• Formula
• Profit testing

Question 6

Diferrentiate the reserving basis from the pricing basis

Answer 6

The reserving basis may be more prudent, stipulated by regulations, to ensure that the insurer has enough capital to settle claims

Question 7

What influences the investment strategy of a life insurer

Answer 7

Term efficiency as well as the size of the assets

Question 8

Match each of the following benefits to an appropriate financial security:
* Guaranteed money terms (can claim amount R on death)
* Inflation linked benefits
* Profit-linked (discretionary) benefits
* Guarantees (in general)

Answer 8

• Fixed-interest bonds
• Real assets - property and index-linked bonds
• Equities and property
• Derivatives

Question 9

Business strain

Answer 9

In the first month, expenses (admin and commsion) might be higher than the premium income

Question 10

What are the key risks under life insurance contracts

Answer 10

• Mortality, longevity and morbidity
• Investment risks
• Expenses being higher than expected
• Early withdrawal before intial expenses are recovered
• New business volume too high, leeading to unsustainable business strain
• Credit risks
• Operational risks

Question 11

Analysis of surplus

Answer 11

An insurance company will be keen to break down the drivers of profits or losses

Question 12

4 types of underwriting

Answer 12

• Medical
• Lifestyle
• Claims
• Financial

Question 13

Use to meet customer’s needs for pure endowment and endowment assurance

Answer 13

• Endowment is used as a wealth transfer
• Both used as a means of repaying loans, usually the principal amount at the end.
• Used as a savings vehicle, for retirement.

Question 14

What would a group version, if it exists, be used for in a pure endowment and endowment assurance

Answer 14

Used by employers to provide death in service as well as retirement benefits for employees

Question 15

Use to meet customer’s needs for whole life assurance

Answer 15

• Funeral expenses
• Tax liability
• Long-term cover for dependents

Question 16

What would a group version, if it exists, be used for in a whole life assurance

Answer 16

No group version exists
Employers do not want to cover people who no longer work for them.

Question 17

Use to meet customers’ needs for term assurance

Answer 17

• Provides a cheap death cover, compared to endowment and whole life, as life is not certain to die within the period.
• Protection against loss for policyholder’s dependents

Question 18

What would a group version, if it exists, be used for in a term assurance

Answer 18

• Death in service
• Credit card companies to get paid in the event of a death.

Question 19

Convertible or renewable term assurance

Define both

Answer 19

Renewable - renew at the end of the original contract - sometimes without further medical underwriting
Convertible - convert into endowment or whole life assurance at a certain date, at a set of dates or anytime.

Question 20

Use to meet customers’ needs for renewable or convertible term assurance

Answer 20

cheap death cover with the option to convert to a permanent solution when it can be afforded.

Question 21

Existence of a group version for renewable and convertible term assurance

Answer 21

Term assurance is offered in a group, there is an option to convert to individual arrangements after living the group

Question 22

Impaired life annuities

Answer 22

Higher annuities for those in ill-health

Question 23

Use to meet customers’ needs for immediate annuities

Answer 23

Income for the remainder of the life of the insured

Question 24

What would a group version, if it exists, be used for in an immediate annuity

Answer 24

Used to payout pensions

Question 25

Use to meet customers’ needs for deferred annuity

Answer 25

Build up a pension that becomes payable on retirement from gainful employment

Question 26

What would a group version, if it exists, be used for in an deferred annuity

Answer 26

Used to fund pensions

Question 27

Income drawdown

Answer 27

Instead of buying an annuity, a memeber remains invested in the fund and withdraws an amount each year

Question 28

Why is income drawdown unlikely to be suitable for members with small accumulated amounts

Answer 28

High administration costs

Question 29

Use to meet customers’ needs for income drawdown

Answer 29

• Should a memeber die before using up all the funds, they can be passed on to dependents
• As opposed to if an annuity is purchased, the insurer would benefit from early death

Question 30

What are the risks to income drawdown for the member

Answer 30

• Income might become too volatile
• If a high level of income is taken, the capital could go down to zero.
• Administration costs might be too high
• Remaining fund may be inadequate to cover dependent’s needs.
• There may be tax on the fund after the member’s death.

Question 31

What would a group version, if it exists, be used for in a income drawdown

Answer 31

Group version does not exist

Question 32

Investment bonds

Answer 32

• Single (usually whole life) premium designed to give investors medium to long run term investments
• Usualy allows withdrawals, with penalities, that increase with an increase in term.
• Pay lumpsum on death