Life Insurance Products

Question 1

What steps form the product life cycle?

Answer 1

PPAMUCEV

Product design
Pricing
Administration
Marketing and sales
Underwriting
Claims management
Experience monitoring
Valuation

Question 2

Surrender

Answer 2

When a policyholder fails to pay all of the premiums required under the contract and receives a lump sum surrender value in compensation for premiums paid to date.

Question 3

Paid up

Answer 3

When a policyholder fails to pay all of the premiums required under the contract and the policy continues without the policyholder paying any more premiums but for a reduced benefit amount

Question 4

Withdrawal

Answer 4

The termination of a policy. Either by surrender or lapse.

Question 5

List the forms of benefit / structural bases of policy

Answer 5

Without-profits
With-profits
Unit-linked
Index-linked

Question 6

Influences on capital requirements of a business

Answer 6

1) Contract design
2) Premium payment frequency
3) Relationship between pricing and supervisory bases
4) Additional solvency capital requirements
5) Level of initial expenses

Question 7

Marginal costs

Answer 7

Costs incurred because the policy exists/is sold e.g. Commission, postage

Question 8

Persistancy risk

Answer 8

The risk that the number of withdrawals is different to that expected

Question 9

Continuation option

Answer 9

Allows employees leaving an employer’s group life scheme to take out individual life cover (either WLA or TA) without medical underwriting

Question 10

Renewable term assurance

Answer 10

A term assurance with the option to renew at the end of the original contract without further medical underwriting unless the benefit level is increased. Premiums may often be guaranteed to be the same as those on new business.

Question 11

Convertible term assurance

Answer 11

A term assurance with the option to convert to another type of contract, such as a WLA or EA without further medical underwriting unless the benefit level is increased. Premiums may often be guaranteed to be the same as those on new business.

Question 12

What does it mean to call a product “conventional”?

Answer 12

Benefits are expressed in terms of values as at the expected claim date e.g. R1m on death within 20 years, rather than in current terms.

Question 13

Key matching risks

Answer 13

CUNT

Currency
Uncertainty
Nature
Timing

Question 14

What does IFA stand for?

Answer 14

Independent Financial Advisor (i.e. An independent broker)

Question 15

Bid price

Answer 15

The maximum price at which the market is willing to buy an asset

Question 16

Offer price

Answer 16

The minimum price at which the market is willing to sell an asset

Question 17

Unit bid price

Answer 17

The price at which the insurer will buy units from the policyholder

Question 18

Unit offer price

Answer 18

The price at which an insurer will sell units to a policyholder

Question 19

When can the unit fund become negative?

Answer 19

1) when investment return is low
2) when low unit fund size leads to large mortality charges
3) when risk charges increase

Question 20

How do negative non-unit reserves arise?

Answer 20

Non unit reserves are calculated prospectively as the EPV of future outgo less the EPV of future income.

We project the future outgo (actual expenses and cost of minimum guaranteed benefit) and the future income (management, risk and admin charges, and surrender penalities).

For a profitable contract, future income is expected to exceed future outgo, leading to a negative reserve.

Question 21

Conventional without-profits policies

Answer 21

Characterized by fully guaranteed benefits and (usually) level regular premiums

Question 22

With-profits policies

Answer 22

Policies where the policyholder has an entitlement to share in surplus arising within the with-profits fund.

Question 23

Unit-linked policies

Answer 23

Policies where benefits are directly linked to the investment performance of a fund of the policyholder’s choosing. Characterised by a lower level of guarantees on benefits and premiums

Question 24

Index-linked policies

Answer 24

Policies where benefits are directly linked to an investment/economic index of the policyholder’s choosing, and are guaranteed to move in line with the performance of that index

Question 25

Which product designs are most profitable? (a little abstract I admit….)

Answer 25

The policies that provide greatest utility to policyholders.

Why?
1) they sell in highest volumes
2) they permit the company to build in higher profit margins
3) they pose lower lapse risk

Question 26

T-ROADS

Answer 26

Ratings
Options
Amounts
Definitions
Structural basis

Question 27

Discretionary benefits

Answer 27

Any benefit whose level depends on the decision of the company rather than being defined in policy conditions