Chapter 6: Life insurance products Flashcards
Key features of life insurance contracts
- 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
What is one of the key focus of contract design in life insurance
Profitability
Formula for calculating profits in life insurance contracts
Premium + investment income and gains - expenses and commisions - claims - reserves (increase in provisions) - Increase in cost o capital - Tax
Underwriting
The process by which an insurer decides the potential risk posed by a potential policyholder
How are premiums set in the life insurance space
- Formula
- Profit testing
Diferrentiate the reserving basis from the pricing basis
The reserving basis may be more prudent, stipulated by regulations, to ensure that the insurer has enough capital to settle claims
What influences the investment strategy of a life insurer
Term efficiency as well as the size of the assets
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)
- Fixed-interest bonds
- Real assets - property and index-linked bonds
- Equities and property
- Derivatives
Business strain
In the first month, expenses (admin and commsion) might be higher than the premium income
What are the key risks under life insurance contracts
- 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
Analysis of surplus
An insurance company will be keen to break down the drivers of profits or losses
4 types of underwriting
- Medical
- Lifestyle
- Claims
- Financial
Use to meet customer’s needs for pure endowment and endowment assurance
- 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.
What would a group version, if it exists, be used for in a pure endowment and endowment assurance
Used by employers to provide death in service as well as retirement benefits for employees
Use to meet customer’s needs for whole life assurance
- Funeral expenses
- Tax liability
- Long-term cover for dependents
What would a group version, if it exists, be used for in a whole life assurance
No group version exists
Employers do not want to cover people who no longer work for them.
Use to meet customers’ needs for term assurance
- 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
What would a group version, if it exists, be used for in a term assurance
- Death in service
- Credit card companies to get paid in the event of a death.
Convertible or renewable term assurance
Define both
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.
Use to meet customers’ needs for renewable or convertible term assurance
cheap death cover with the option to convert to a permanent solution when it can be afforded.
Existence of a group version for renewable and convertible term assurance
Term assurance is offered in a group, there is an option to convert to individual arrangements after living the group
Impaired life annuities
Higher annuities for those in ill-health
Use to meet customers’ needs for immediate annuities
Income for the remainder of the life of the insured
What would a group version, if it exists, be used for in an immediate annuity
Used to payout pensions
Use to meet customers’ needs for deferred annuity
Build up a pension that becomes payable on retirement from gainful employment
What would a group version, if it exists, be used for in an deferred annuity
Used to fund pensions
Income drawdown
Instead of buying an annuity, a memeber remains invested in the fund and withdraws an amount each year
Why is income drawdown unlikely to be suitable for members with small accumulated amounts
High administration costs
Use to meet customers’ needs for income drawdown
- 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
What are the risks to income drawdown for the member
- 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.
What would a group version, if it exists, be used for in a income drawdown
Group version does not exist
Investment bonds
- 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
