F_Short q's 6 Flashcards
i. Define what is meant by the term “internal unit-linked fund”. [1]
i. An Internal unit linked fund:
• Consists of a clearly identifiable set of assets, e.g. equities.
• Is divided into a number of equal units consisting of identical sub-sets of the fund’s assets and liabilities.
This division is notional.
In the context of unit-linked life insurance savings products:
i. Describe briefly the difference between a bid pricing basis and an offer pricing basis [2]
(i) An offer pricing basis is the pricing basis used when the company is a net creator of units.
Under this basis, both the bid and offer prices are based on the appropriation price, i.e. the total cost of creating a unit.
A bid pricing basis is the pricing basis used when the company is a net canceller of units.
Under this basis, both the bid and offer prices are based on the expropriation price, i.e. the net receipt when cancelling a unit.
i. List the factors which can influence the unit price of an equity based on internal unit-linked fund. [5]
i. (i) Equity market movements to the extent that they affect this unit-linked fund. Dividend receipts.
Purchase/sale expenses incurred from buying/selling. Amount of current assets/liabilities in the fund. Accrued tax.
Approach taken to rounding.
Initial charge on purchase/allocation of units to cover management expenses, commission and profits.
Annual management charge.
Whether pricing is on a bid or offer basis, which itself depends on the relative levels of cashflow into or out of the unit fund over a reasonable period. Foreign exchange rates if underlying assets are in a different currency to that used in pricing the unit linked fund.
Company A and Company B are life insurance companies operating in the same market. Both companies sell with-profit endowment assurances with surplus distributed using the UK-style additions to benefits method.
The bonus philosophies of the two companies differ. Whereas Company A has tended to have lower and more stable reversionary bonuses than Company B, Company B has tended to have lower and more stable terminal bonuses than Company A.
iii. Describe the key characteristics of the revalorisation method of distributing surplus and state, with a reason, which of the two additions to benefits bonus philosophies described above is moresimilar to the revalorisation method. [3]
(iii) Under revalorisation, bonuses are granted by a % increase in reserves (and usually the same % increase in premiums and benefits).
It is common to divide the surplus between the investment surplus, most of which would be distributed to policyholders, and surplus from other sources, which may be entirely for shareholders.
Since the surplus is distributed as it arises (with little or no deferral), this method is more similar to the philosophy of company B.
Further, the proportion of the surplus to be distributed is specified upfront
LifeCo writes its conventional whole of life policies targeted at low-income consumers through insurance brokers. There is limited underwriting on these policies and insurance brokers are remunerated solely through initial commission on the sale of the policy. The distribution manager has suggested that LifeCo introduces a new commission scale where higher levels of commission are paid to brokers that have been identified as “key brokers”.
i. List four criteria LifeCo might use to define “key brokers”. [2]
i. It is likely that the distribution manager will want to reward brokers that:
• write high volumes of business for the insurer
• have access to particular target markets that are seem as key for future sales
• write more business with higher premiums / sums assured for insurer
• write business that has good persistency (including during the cooling-off period)
• write business that has good mortality experience
• perform some of the administrative tasks
• meet a certain standard of training/qualification which demonstrates their ability to sell in a knowledgeable way
A life insurance company wishes to introduce a guaranteed insurability option on its term assurance product. All policyholders will pay a premium for the option and on expiry of the original policy term, they can take out a new policy on the then standard premium rates without evidence of health.
iii. Explain the key assumptions necessary to price the option, and outline how the pricing actuary should go about setting these assumptions. [9]
Expenses
• While not one of the most important assumptions, the office will need to build in expense loading sufficient for it to recoup its development and other expenses over the expected volume of business (which is uncertain).
A life insurance company wishes to introduce a guaranteed insurability option on its term assurance product. All policyholders will pay a premium for the option and on expiry of the original policy term, they can take out a new policy on the then standard premium rates without evidence of health.
iii. Explain the key assumptions necessary to price the option, and outline how the pricing actuary should go about setting these assumptions. [9]
Profit / Safety margin
- This would be required in order to ensure the option is profitable.
- The safety margin would be included as there will be significant uncertainty around some of the assumptions including the take up rate.
- As the option is more risky, you should use the profit margin for the term product plus an additional margin for the extra riskiness.
A life insurance company wishes to introduce a guaranteed insurability option on its term assurance product. All policyholders will pay a premium for the option and on expiry of the original policy term, they can take out a new policy on the then standard premium rates without evidence of health.
iii. Explain the key assumptions necessary to price the option, and outline how the pricing actuary should go about setting these assumptions. [9]
Investment return
- The option premiums will need to be accumulated until the end of the policy term to pay for the additional death claims that will be incurred due to the extension being allowed without further medical evidence.
- If the company has a whole of life product it could use the same investment return as it uses in that pricing.
- Alternatively, the yield on gilts of a term equal to the average term policy issued would be appropriate.
- The yield should be lowered for reinvestment risk and taxation.
A life insurance company wishes to introduce a guaranteed insurability option on its term assurance product. All policyholders will pay a premium for the option and on expiry of the original policy term, they can take out a new policy on the then standard premium rates without evidence of health.
iii. Explain the key assumptions necessary to price the option, and outline how the pricing actuary should go about setting these assumptions. [9]
Take up rate at end of term
- This is needed to know how many people will exercise the option .
- As we will have no experience on this, getting advice from a reinsurer or a consultant is probably the best way to set this assumption.
A life insurance company wishes to introduce a guaranteed insurability option on its term assurance product. All policyholders will pay a premium for the option and on expiry of the original policy term, they can take out a new policy on the then standard premium rates without evidence of health.
iii. Explain the key assumptions necessary to price the option, and outline how the pricing actuary should go about setting these assumptions. [9]
Lapse / Withdrawal
- This is needed to know how many policies will be left at the end of the term.
- Use the historical experience on the term assurance product.
- May decide on slightly lower lapses at the durations near the end of the term as some people who lapsed previously may now be incentivised to remain due to the option.
