Life insurance products (1)

Question 1

Generally define

Life insurance products

Answer 1

In return for one or more premiums paid by the customer, the insurer constract to pay benefits which are in some way contingent upom human life.

Question 2

Describe the

Needs met by Life insurance contracts

3 main points to consider

Answer 2

• Savings
• Protection
• Savings and Protection

Question 3

Define

New Business strain

Answer 3

The combination of the initial cash outflow, any prudence in the reserves and the need to establish a required solvency margin means that moeny has to be found initially in order to write new business

Asset share = P-E So NBS = V - Asset share

Question 4

Describe

The personal financial life cycle

Question 5

Describe

The product cycle

Question 6

Endowment assurances

The needs of consumers

Definition first, then how it meets needs

Answer 6

Pays benefit on survival to a known date
- savings: lumpsum on retirement or repaying capital on interest only loan
- protection
- transfer of wealth

Question 7

Endowment assurances

Surrender value

Existence and form

Answer 7

• Typically available
• product design desicion
• may ot be related to death or maturity benefit
• usually increase over time

Question 8

Endowment assurance

Types

Answer 8

• without-profit
• with-profit
• unit-linked

Question 9

List

The factors that affect the level of capital requirements

There are 5

Answer 9

CLAPP
Contract desing
Level of intial expenses
Additional solvency capital requirements
Pricing and reserving bases relationship
Premium payment frequency

Question 10

Endowment assurances

Group version

Answer 10

• a way for an employer to provide some form of insurance cover or savings benefit to employees as part of their overall remuneration package
• would enable an employer to provide benefits for empoyees at retirement and maybe also on death in service
• administration can become costly due to mobility of the workforce
• might result in poor suurende values for employees that leav early

Question 11

Endowment assurances

The risks

Answer 11

Investment risk
- Due to savings nature
- without-profits: benefit is guaranteed, therefore high risk that investment returns are lower than allowed for in premiums
- with-profits: lower risk, since bonuses can be reduced if returns are lower than expected, however, there is still a guaranteed element, PRE, shareholders’ RR, marketing
- unit-linked: risk is borne by policyholder, however charges are linked to fund size, damage to future sales

Mortality risk
- Death = survival benefit: high mortality risk at start
- Death benefit = return of premium or fund: insigificant risk, except near start of contract
- no death benefit: longevity risk, with increasing significance over duration in force

Expense risk
- risk that actual marginal and fixed costs are higher than expected/allowed for in premiums or charges

Withdrawal risk
- risk that number of withdrawals are different than expected
- when asset share is negative: there is financial risk from withdrawal

Risks under group contracts
- adds no additional risks
- anti-selection risks are reduced (compulsory cover and restrictions on the level of cover)
- concentration risk may arise

Question 12

Endowment assurances

Capital requirements

Answer 12

Contract design
- whether design enables reserves and solvency margins to be kept low
- lower initial reserves = lower capital requirements
- slower increase in reserves over the contract’s term = faster invested capital is released
Level of initial expenses:
- higher expenses = lower initial asset share = higher capital requirement
Additional solvency capital requirements
- inverse relationship between level of solvency margin and supervisory reserves
Premium payment frequency
- capital requirements for:
monthly > annual > single premium
Pricing and reserving bases
- the stronger the reserving basis compared to pricing basis, the more cpaital is needed