F102 Summaries P3 Flashcards
actuarial funding summary
with AF the company buys fewer units than it should when premiums are received and then uses some of the future fund management charges to buy back the missing units over time. by anticipating future management charges, bringing forward the positive cashflows, we produce a better match for the initial expenses
why is actuarial funding possible/justifiable re units?
a net cashflow will emerge from the unit fund on allocation of each premium equal to the difference between the premium paid and the actuarially funded value of the units purchased.
actuarial funding will reduce NBS and reduce the COC required to issue the policy.
why is there no investment risk with AF
there is no investment risk because the liability to buy lost units in the future is exactly matched by the future fund management charges that will be used to do this.
what is the purpose of AF
the purpose of AF is to reduce NBS on certain kinds of unit linked contracts
for what kind of product design will AF be useful?
usually where at least one type of unit has relatively high fund management charges which are used primarily as a means of recouping the initial expenses. there wouldn’t usually be an explicit initial charge, only level regular fund management charges.
A surrender penalty would have to be imposed, at least for an initial period of years.
any design for which the regular fund management charges are raised in order to recoup the initial expenses would be appropriate.
what problem does AF solve
the problem is that there is a mismatch between income and outgo: a large outgo = initial expenses occur a the start of the policy, whereas the income to cover it is received regularly over the term of the policy. this produces a large initial capital strain when a policy is sold.
the mismatch is by nature as well as timing - the fund management charges are investment linked as they are a % of future fund values. this means that the amount of income received to pay for the initial expenses is subject to investment risk.
what are the necessary conditions for AF to apply?
- the unit fund must be contingent on death and usually on survival for a minimum period of years.
- there needs to be sufficient regular fund management charges available, the limiting condition is that, after AF, prudently projected future net cashflows to the insure remain positive.
- there must be a unit related related surrender penalty imposed, such that the unit reserve is not lower than the surrender value payable.
how do you calculate the actuarially funded unit reserves?
the nature of the contingent payment means that we can discount the unit fund benefits as an endowment assurance, for a term equal to the residual survival period, using a maximum theoretical discount rate equal to the annual fund management charge.
the requirement to cover the regular ongoing cash outflows usually forces us to discount the unit funds at a lower discount rate than the theoretical maximum.
where capital and accumulation units are used, this rate may equate to the difference between the management charges on the 2 units.
model risk
the risk that the underlying model is not adequate
parameter risk
the risk that the parameters assumed for the underlying model are incorrect
random fluctuations risk
the risk of unpredictable fluctuations arising from sample error. the smaller the sample the greater the risk
policy data risk
inadequate, inaccurate or incomplete policy data could lead to incorrect results and recommendations in actuarial investigations, including those performed for for supervisory authorities.
where model office is used, this may not represent the in force business accurately enough
risks in using other data
data used in the formulation of actuarial assumptions may be inadequate. even where the data is accurate within itself, it may not be applicable to the purpose for which the actuary requires them.
availability of reliable and appropriate data is likely to be limited for health and care products
risks in claims experience for health and care products
life insurance is relatively straightforward. but, healthcare insurances cover events that are more complex and benefits that can vary according to teh severity of the episode.
For IP and LTCI the main risk relates to the mis-estimation of the transfer probabilities in the underlying multiple state model. For CI products the main risk is the rates of diagnosis of the critical illnesses specified in the contract.
expense risk
there is a risk of higher than expected expenses.
higher than expected inflation of expenses leads to an expense risk. this can have model, parameter and random components.
contributions to expenses from premiums and charges may be significantly mismatched with the actual expenses incurred over time.
withdrawal risk
the unpredictability of withdrawals makes it a risk. early withdrawals usually represent a particular risk of loss, because of the failure to recoup initial expenses and asset shares can be very low or negative as a result.
if withdrawal experience is different from expected it may invalidate assumptions about the effects of selective withdrawals on mortality experience. expense assumptions may also be invalidated due to the effect of withdrawals on the volume of business in force.
risk of the mix of business by nature and size of contract
the unpredictability of the mix of new business by nature and size of contract is a risk for the insurer.
unexpected variation in nature and size may change the risk profile of the company, which may lead to an overstretching of the company’s capital and other resources available to cover the risk.
examples of a contracts nature:
class of business
type of contract
contract design
premium frequency
