F102 P1 Flashcards
Matching
this refers to the relationship - by size and timing - between the cash flows from the assets and the liabilities. the assets and liabilities of a life insurance company are said to be absolutely / perfectly matched if the 2 cash flows cancel out. otherwise, the company is said to be mismatched. In practice, absolute matching is almost impossible to attain, except in very special circumstances, therefore, some degree of mismatching is inevitable and acceptable. Provided the mismatching does not lead to an unacceptable probability of insolvency for the insurer, then it is acceptable.
Reinsurance
Reinsurance is the process by which a direct writing life insurance company transfers part of its risk under a contract to another life insurance company.
This may be a another direct-writing company or a professional reinsurance company. The reinsuring company may in turn reinsure some of the risk with another direct-writing insurer or reinsurance company. Larger companies may also use reinsurance to transfer liabilities between companies within their own group.
Requirement for capital
On a per contract basis, the requirement for capital is the amount of finance a company needs in order to be able to write that contract, i.e. the new business strain.
This can be extended to the whole company where its requirement for capital is the finance it needs in order to be able to carry out its business plan, and could include writing new business, acquiring an existing business, or investing in infrastructure such as new computer hardware or software.
Return on Capital
This is broadly defined as profit (before tax) divided by capital employed, expressed as a percentage. It arises in the context of product pricing. A company will usually need to provide capital in order to write new business. The expected return on that capital will influence whether or not the company writes particular types of business and the price at which it will write them.
The expected level of return required will depend on the expected levels from other uses of the company’s capital.
Solvency
A life insurance company is solvent if its assets are adequate to enable it to meet its liabilities and any solvency margin that it is required to hold. Insurance supervisory authorities will usually have requirements, in terms of the values a company can place on its assets and liabilities, for the purpose of demonstrating statutory solvency.
Solvency margin
The solvency margin of a life insurance company is the excess of the value of its assets over the value of its liabilities.
Insurance supervisory authorities may have requirements as to the minimum level of solvency margin that a company must have.
Risk discount rate
A risk discount rate is a rate at which future cash flows might be discounted. It typically arises when carrying out a profit test of a life insurance contract. It represents the risk free rate of return that the providers of capital demand plus an amount to allow for the risk that the profits may not emerge as expected from the contract.
It also arises in the determination of embedded and appraisal values.
Unitised contracts
After deducting an amount to cover part of its costs, each premium under a unitised contract is used to buy units at their offer price. These units are added to the contracts unit account.
When the insured event occurs, the amount of the benefit is the bid price value of all the units in the contracts unit account. This may be subject to a minimum amount specified in monetary terms (a guarantee of sorts)
The price of the units may either relate directly to the value of the assets underlying the contract or may be related to an investment or other index, or may be based on smoothed asset values with a guarantee that the price of the units will not fall.
Unitised contracts include unit linked contracts and those accumulating with profits contracts that are written on a unitised basis.
Terminal Bonus
A terminal bonus is a bonus that may be payable on maturity, death or surrender of a with profits contract. It is typically a percentage, varying with duration in force and possibly with the original policy term, of attaching regular reversionary bonuses and/or sum assured under a conventional with profits contract, or of the accumulated benefit (allocated premiums, less any charges, plus regular bonuses added to date) under an accumulating with profits contract.
Smoothing
A with profits policy normally invests in equities and property, resulting in more variable returns than if it were invested in lower risk investments. Instead of paying out the exact asset share, with profits funds aim to even out some of the variations in investment performance. profits and losses are spread from one years to the next so that, in total, all the investment surplus are paid out in the long term.
The effect is a reduction in investment risk for the policyholder.
As well as smoothing of investment returns over time, life insurance companies also smooth payouts across individual policies at any point in time. This reflects the pooling effect of insurance and the practicalities of bonus setting.
Pre existing conditions exclusion
This is an exclusion use din non - underwritten health care contracts (e.g. critical illness insurance). Under the terms of the exclusion, cover is not provided in respect of any critical illness listed in the policy that the life insured has already suffered, i.e. where the condition existed before the commencement of the cover. It is also usual to exclude cover for any critical illness where the life insured has previously suffered from a medical condition that gives a greater risk of a particular critical illness occurring.
Policyholder reasonable expectations
This relates to policyholders reasonable expectations with regards to the amount of benefits or charges under contracts where these are at the discretion of the life insurance company.
There is no generally accepted definition of PRE, but they will be influenced by e.g. the past practice of the company and any literature it has issued (as well as what competitors / the market is doing).
The concept of PRE is linked to the idea of treating customers fairly. In some jurisdictions, there may be a statutory requirement placed on an insurer to meet minimum standards in this respect.
Types of genetic tests
A genetic test can be predictive or diagnostic:
Predictive genetic test is taken prior to the appearance of any symptoms of the genetic condition in question
Diagnostic test is taken to confirm a diagnosis based on existing symptoms
Long term care insurance
This type of insurance can be used to help provide financial security against the risk of needing either home or nursing home care as an elderly person, i.e. post retirement.
The contract could pay for all the costs of care throughout the remainder of life (an indemnity contract), or could provide a cash lump sum or annuity to contribute towards the costs of care.
Non unit reserve
A company will have non-unit liabilities under its unitised contracts (e.g. the expenses of managing the business) for which it receives monetary payments in the form of the future charges it extracts from the unit account. If it expects that the charges will not be sufficient to meet these liabilities at any point on a cash flow basis , it has to hold a non unit reserve to provide for the deficiency.
Depending on the regulatory regime and any related constraints, it may be possible for a life insurance company to hold la negative non unit reserve where it expects that future charges will be more than sufficient to meet the future non unit liabilities.
Paid up policy
This is a regular premium policy under which no further premiums are payable and sufficient premiums have been paid such that benefits are paid on claim even without the payment of further premiums. It normally arises because the policyholder decides not to pay any further premiums, in which case the company would reduce the benefits under the contract allowing for the actual premiums paid.
Under some regular premium policies, premiums may be contractually payable for a shorter term than the term of the contract. When the premium paying term has expired, such policies are sometimes referred to as “fully paid up”.
