Exam Insights Flashcards
Types of charges that can be levied on a unit linked fund: (7)
- Reduced allocation rate
- Bid offer spread
- Administration fee (might be called policy charge or policy fee)
- Fund management charge
- Switch charge
- Mortality charge
- Charges for other benefits
What is meant by a market consistent valuation, in the context of a valuation of a LI company’s liabilities?
In theory, it is the price that someone would charge for taking responsibility for (the ownership) of a liability, in a market which such liabilities are freely traded
10 reasons why insurer will have free assets:
- Ensure PH obligations are met if future experience is worse than expected
- Minimum level will be required by regulator
- Finance future new business strain
- Enable less reinsurance to be purchased
- Enable less restrictive investment strategy to enhance expected return
- Support management strategies eg take advantage of other profitable opportunities
- Smooth dividend payments to shareholders
- Smooth surplus distribution and thus support PH expectations
- Provide confidence to policyholders, shareholders and brokers
- Improve credit ratings and thus reduce debt financing cost
What is dynamic solvency testing (DST)?
It is a projection of the company’s revenue account and balance sheet (and thus solvency level) for a specified future period.
The projection can be done deterministically or stochastically. Of deterministic, the projection basis should include possible adverse scenarios
Assumptions required to calculate the EV (12)
- Mortality rates and improvements
- Disability rates
- Withdrawals
- Expense and expense inflation
- Benefit inflation and claim size
- Premium collection rate
- Commission clawback rate
- Investment returns, valuation discount rate or valuation interest rate
- Volatility of investment mix
- Future asset mix
- Future new business volumes (may affect per policy expense assumption)
- Future changes in tax rates
4 reasons for deferring surplus distribution:
- Improve solvency position
(once bonus is declared, it increases guarantees provided by company) - Business objective
(Leads to relatively higher free assets = more investment freedom) - Source of funding
(act as source of funding for insurer, essentially borrowing from PH, enable insurer to write more business, insurer will have more free assets to absorb strain, finance other business expenses such as new product development costs) - Meeting policyholder expectations
(PH may want insurer to smooth investment returns, can only be achieved by deferring profit distribution in years where investment returns are good and distributing more than earned in years when returns are poor)
Factors determining bonus rates: (6)
- Financial soundness of the fund
- Investment strategy
- Ability to deal with adverse experience
- Bonus philosophy
- Policyholders’ reasonable expectations
- Competition
Hownto deal with anti-selection risk in the case of altering a policy: (3)
- Require declaration of continuing good health
- Restrict the conditions on which this alteration can be performed, for example, linknit to a life event such as the birth of a Child
- Underwrite alteration and modify the terms offered if necessary
Various types of UW available to the insurer at policy inception: (3)
- Medical
- Financial
- Avocational/Occupational (will determine dangerous hobbies or occupation)
General exclusions on policies: (10)
- War, terroriste, acts of violenxe
- Pre-existing conditions
- Hazardous past times or sport
- Aerial activities other than as a fare-paying passenger
- Self inflicted injuries or attempted suicide
- Criminal acts
- Experimental treatments
- Cosmetic surgery
- Failure to seek or follow medical advice
- Drug or alkohol abuse
What does the difference between the earned asset share and the surrender value represent?
- The accumulated value of profit made to date
- Plus the present value of profit expected to arise in the future from the difference in the assumptions in the pricing basis and surrender value basis
How to calculate appraisal value:
Appraisal value = EV + goodwill
Where goodwill refers to future business
The conditions that may be specified by the regulatory for the holding of negative non-unit reserves:
- Sum of unit and non-unit reserves for a policy should not be less than any guaranteed surrender value
- Future profits arising on a policy with negative non-unit reserve need to emerge in time to repay the loan
- After taking account of the future non-unit reserves, there are no future negative cashflows for the policy i.e. there should be no future valuation strain
- In aggregate, the sum of all non-unit reserves (incl from other business) should not be negative
- Negative non-unit reserves cannot be used to offset unit reserves
- Assumptions must be prudent in order to ensure that the negative non-unit reserve is not too aggressive resulting in upfronting of profit recognition
