M_Life Products

Question 1

What kind of product design lends itself to actuarial funding

Answer 1

• one where at least one type of unit has relatively high fund management charges which are primarily used as a means of recouping initial expanses.
• usually no explicit initial charge, only regular fund mgt charges
• a surrender penalty would have to exist for at least an initial period e.g. 5 years
• product may have a capital and accumulation unit structure

Question 2

what problems does actuarial funding solve?

Answer 2

• mismatch between income and outgo.
• large initial expenses at the start of the policy whereas income to cover the expense is received regularly over the term of the policy.

this results in a large initial capital strain wen the policy is sold/incepted.

Question 3

The reserving basis is strengthened, there are no immediate changes to the value of the asset share. But what are the secondary effects?

Answer 3

• capital required for new business sales increases. Larger deductions should therefore be made at early policy durations in the AS+ to pay for increased cost of capital. this will reduce the future AS+ for such policies.

Question 4

bonus distribution considerations

Answer 4

distributions should:

• be in accordance with PRE
• satisfy the requirement for equity between different groups of ph including the different generations and policy types
• not interfere withe the company’s new business plans, investment strategy or solvency

Question 5

Product features Term assurance

Answer 5

The benefit is payable on death of the life assured, within the term of the contract.

Question 6

Product features Unit-Linked Endowment

Answer 6

Single or regular premiums could be paid and contracts could be on a single or joint life basis.

Question 7

Product features Unit-Linked Endowment

Answer 7

The product can be used to cover an interest only mortgage.

Question 8

Product features Unit-Linked Endowment

Answer 8

Premiums payable by the policyholder can be flexible.

Question 9

Product features Unit-Linked Endowment

Answer 9

The policyholder can select which fund or funds to invest in and can switch between different funds.

Question 10

Product features Unit-Linked Endowment

Answer 10

Charges to cover the cost of any life cover and expenses can be taken from the premium before being used to purchase units or deducted from units already purchased. The charges can be guaranteed or reviewable.

Question 11

Product features Unit-Linked Endowment

Answer 11

The sizeof the benefit payable on death tends to be a fixed monetary amount or the value of the units held, if higher.

Question 12

Product features Unit-Linked Endowment

Answer 12

The sizeof the benefit payable on survival to the end of contract would be dependant upon the value of units held in a number of unit-linked funds.

Question 13

Product features Unit-Linked Endowment

Answer 13

A surrender value would be payable within the term of the contract, subject to a possible surrender penalty in the early years.

Question 14

Product features Unit-Linked Endowment

Answer 14

A benefit is also provided if death occurs within the term of the contract.

Question 15

Product features Unit-Linked Endowment

Answer 15

The benefit is payable on survival to the end of the term of the contract, chosen at outset.

Question 16

Product features Term assurance

Answer 16

There is no surrender value payable under the contract and the contract expires if the required premiums are not paid.

Question 17

Product features Term assurance

Answer 17

The convertible form of the contract allows policyholders to convert their policy to an endowment or whole of life contract, or to renew their existing contract. Conversion or renewal would be without the need for further medical evidence.

Question 18

Product features Term assurance

Answer 18

The group equivalent of the contract can be used by an employer to provide benefits to an employee’s dependants upon the employee’s death.

Question 19

Product features Term assurance

Answer 19

The contract can be used to provide protection against the financial loss of the death of a key person or can be used to provide a benefit on death to cover the outstanding balance on a loan.

Question 20

Product features Term assurance

Answer 20

The benefit can be level or decreasing through the term, once chosen at outset, the insurer cannot alter the benefit or premiums paid by the policyholder.

Question 21

The reserving basis is strengthened, there are no immediate changes to the value of the asset share. But what are the secondary effects?

Answer 21

• an increase in reserves reduces the insurers investment freedom and therefore reduce the future investment return potential, which will ultimately result in lower AS+

Question 22

Actuarial Funding Mismatching

Answer 22

Mismatch occurs by nature and timing:
fund management charges are investment linked (since % of fund values)
Therefore, amount of income received to cover expenses is subject to investment risk. (policy expenses are initially known & fixed in monetary terms and subsequently increasing by an index such as price inflation)