M_F102_Unit-linked life contracts 2 Flashcards
UL Capital Requirements
Capital Requirements depend on product design
Premium frequency/allocation percentages/charges
Ability to take credit for future charges in reserves
How is Unit Pricing achieved
Basic Equity Principle: “The interests of unit-holders not involved in a unit transaction should be unaffected by that transaction.”
Appropriation Price – price when creating units
Expropriation Price – price when cancelling units
Offer Basis
Offer Basis – marginal transaction = creation of units
Money in = # units created x Appropriation Price
Bid Basis
Bid Basis – marginal transaction = cancellation of units
Money out = # units cancelled x Expropriation Price
Offer Price-
Offer Price- units offered to policyholder
Bid price
Bid price - units bought from policyholder
Actuarial Funding
Technique allowing insurance companies to hold lower unit reserves
– reduces new business strain.
Taking credit at inception for part of future charges.
Money saved is used to cover initial expenses.
Missing unit funds are then bought by future management charges. (But management charge has to be higher than necessary so this can be covered)
Interest at rate <= rate of annual fund management charge
Actuarial Funding portion transferred to non - unit fund
Remainder of UFt can be transferred to non-unit fund
Reduces initial strain
But also reduces future management charges transferred since based on actual units purchased
Creates extra non-unit liability die to death shortfall
Repay lost units from management fee
Better matching of cash flows
Take care with death and surrender payments (consider limits)
Generally used for capital units (high management fee)
Effects of the remainder of UFt can be transferred to non-unit fund
Reduces initial strain
But also reduces future management charges transferred since based on actual units purchased
Creates extra non-unit liability due to death shortfall
Repay lost units from management fee
