F102 Summaries P2 Flashcards
the asset share of a policy is the accumulation of (+)
premiums
actual investment income
miscellaneous profits
the asset share of a policy requires the subtraction of (-)
commission and expenses
cost of all benefits in excess of asset share
tax - always refer to unrealised CGT and estimation errors
profit transfers to shareholders
cost of capital required to support new business strain
contribution tot he undistributed surplus of the with profits policyholder fund required to support the smoothing of bonuses and increase investment freedom
WP surplus distribution options
increasing ph benefits
immediate cash refund
reducing future premiums payable
WP surplus distribution key decisions for insurer
how much surplus it can afford to distribute
how it will divide surplus between different groups of policyholders
if it has shareholders, how it will split surplus between shareholders and policyholders - this may be controlled by legislation, established practice or the company’s own rules.
simple regular reversionary bonus
bonuses are declared as a percentage of the basic benefit only
compound regular reversionary bonus
bonuses are declared as a percentage of the basic bonus plus attaching bonuses
super compound regular reversionary bonus
bonuses are declared using different percentages of basic benefit and attaching bonuses
which reversionary bonus method defers surplus distribution the most, followed by which?
super compound
compound bonus
simple bonus
additions to benefits - AWP
can be unitised or non unitised
they operate superficially like a deposit account, with premiums being allocated to a policyholder account, which is then increased at a guaranteed rate of accumulation (can be 0) and by regular discretionary bonuses. a terminal bonus may be added at maturity, death or surrender.
A MVR may be applied on surrender.
for unitised, the regular bonus may be given as additional units with a fixed price or as an increase in the price of the units.
bonus distributions considerations
bonus distributions should:
- be in accord with policyholders reasonable expectations
- satisfy the requirements for equity between different groups of policyholders, including different generations
- not interfere with the company’s new business plans, investment strategy or solvency
revalorisation
bonuses under the revalorisation method are granted by increasing the reserves, benefits and premiums of WP contracts by a percentage e.g. r%
contribution method dividends
the contribution principle is that each policy receives a share of distributable surplus in proportion to its contribution to surplus. for this purpose, policies are classified into reasonably homogeneous groups.
Dividends may be paid as a cash sum (reduces IC assets), converted to additions to the benefits (increases IC liabilities) or used to reduce future premiums (reduces IC income)
how is PRE built up?
documentation issued by the LIC
the LIC’s actual past practice
the current practice in the life insurance market
main insurer distribution channels
independent intermediaries
tied agents
own sales force
direct marketing
independent intermediaries
select products for their clients from all of those available in the market
rewarded through commission from companies or fees from clients
tied agents
offer the products of only one life insurance company or of a small number of life insurance companies - the products are usually mutually exclusive
rewarded through commission
own sales force
usually employed by a particular company to sell its products directly to the public
rewarded by salary or commission or both
direct marketing
via mailshots, press advertising, over the phone or internet
the government may impose restrictions on LIC’s with the aim of protecting policyholders. Common restrictions include
- restriction on the types of contract that a company can offer
- restriction on the premium rates or charges for some types of contracts
- requirements relating to the terms and conditions of the contracts
- restrictions on the distribution channels, sales procedures and information provided at point of sale
- restrictions on the ability to underwrite - to avoid discrimination
- an indirect constraint on the amount of business that may be written via min reserving or solvency margin requirements
- restriction on the types of asset or the amount of any particular asset that the LIC may invest in for the purposes of demonstrating solvency.
common approaches to LIC taxation
- tax on the annual profits of the business
- tax payable on investment income less operating expenses of the LIC
in comparing the tax advantages of different products consider
- the taxation of the life insurers funds during the life of the contract
- the tax treatment of the eventual policy benefits paid
- the tax treatment of premiums paid, in particular whether the premiums are deductible front eh individuals taxable income in full, in part or not at all and whether there is a tax on the premium itself.
to assess overall risk, the LIC should use
model office projections typically incorporating stochastic modelling and sensitivity testing
risk of loss of the LIC has to be measured in terms of the effect it may have on the aims of the LIC, the aims are
maximise profits
maximise return on capital
risk must be assessed in relation to
the company’s capital and other resources
its impact on supervisory solvency
the cost of failng to meet any other legislative requirements
credit downgrading of a company is a risk to the success of the company because it can lead to
- adverse publicity, thereby causing marketing difficulties (early w/d fewer sales)
- increased difficulty in raising capital, thereby increasing the cost and / or limiting the company’s ability to follow capital intensive projects (increasing COC -> increasing price -> increasing reserves)
unit pricing equity principle
the interests of unit-holders not involved n a unit transaction should not be affected by that transaction
investment strategy of a lic
the investment strategy of a lic is of paramount importance to its commercial success, financial performance and security.
the lic should invest so as to maximise the overall return on the assets, subject to an acceptable level of risk.
assets should be selected to match the nature, term and currency of the liabilities, where by term we mean the discounted mean term.
the nature of the liability outgo can be considered as one of the following
- guaranteed in money terms
- guaranteed in terms of some non investment index
- discretionary
- investment linked liability
matching a liability guaranteed in money terms
immunisation theory can be used to build up a suitable portfolio of government bonds, but there are a number of problems and limitations with this approach. normally an appropriate balance between risk and return would be chosen after dynamic asset liability modelling, in order to allow for free assets.
for wp contracts, the amount of the discretionary liabilities may influence the asset choice, permitting a riskier investment strategy.
matching a liability guaranteed in terms of some non investment index
the ideal is to invest in some asset based on the same index, failing that, use the most similar asset available.
matching an investment linked liability
it is normal to invest in the assets underlying the investment link concerned.
matching discretionary liabilities
the ideal would be to invest in high return / high risk assets. however, this will be subject to not exceeding the degree of risk acceptable to policyholders and not exceeding the degree of risk allowable given the extent of free assets available.
overall investment strategy for lic
in deciding on the investment strategy, the company will need to consider any statutory or regulatory constraints.
the overall principle is to invest away from a matched position to the maximum extent possible consistent with the desired level of risk, in order to maximise returns for shareholders as appropriate.
how can the lic use asset liability modelling to test proposed investment strategies?
the company will perform asset liability modelling to test the proposed investment strategies which could be used alternatively to investigate:
- the level of riskiness of investment strategy that can be supported
- the level of free assets required to support any strategy
- the resulting probability of insolvency
- noting the interdependence between the above aspects
group business underwriting is characterised by
- compulsory cover or minimum take up rates for voluntary schemes
- free cover limits, whereby a certain level of benefits is available without individual underwriting, may be offered through group schemes because of reduced anti-selection risk
- eligibility to start cover is typically conditional on an employee being “actively at work”
how can underwriting be used to manage risk
underwriting will
- protect the insurer against anti selection
- identify the lives with substandard health risk
- identify the special terms to offer the substandard risk
- help to ensure that all risks are rated fairly
- help ensure that mortality experience is consistent withe the pricing basis
- reduce the risk from over insurance through financial underwriting
underwriting is particularly important for contracts that have a high sum at risk
medical underwriting
by obtaining various pieces of medical evidence the company will be able to gauge the health of an applicant and hence decide on the appropriate premium rates or possibly decide to reject the proposal.
types of medical underwriting
- questions on the proposal form completed by the applicant
- reports form medical doctor that the applicant has consulted
- a medical examination carried out on the applicant
- specialist medical tests on the applicant
financial underwriting
the company should ensure that the proposed policy is in keeping with the probable needs of such an insured life - in particular that the sum assured is not noticeably high. this will help ensure that:
- the premiums are affordable
- the applicant is not trying to commit fraud
special terms post underwriting
applicants whose state of health does not reach the required standard might be
- declined
- deferred
- offered special terms
- -higher premium
- -reduced benefit
- -policy exclusion
- offered an alternative policy
some underwriting can be done at claims stage
determining the level of underwriting to use.
uw is part of a lic’s risk management strategy. the level of uw required should balance the risk to the company of mis-estimating the risk and the cost of the actual uw.
hence, the evidence requirements normally increase with the sum at risk - the trigger points are known as medical limits.
sales vs underwriting
strict uw will discourage sales conversely, relaxed uw may improve marketability.
policy options may be available where the ph can increase or extend the length of cover without evidence of health.
regulations vs underwriting
regulation may constrain the level and type of underwriting that is permitted e.g. the use of genetic testing
reinsurance vs underwriting
a reinsurance treaty will normally require a certain level of underwriting.
the terms offered will depend on the underwriting standards in place and it is usually the responsibility of the insurer to ensure that the required standards are met.
