The Big Picture

Question 1

Layout of a life company’s revenue account

Answer 1

Premiums received
Investment income
(Increase in reserves)
(Benefit payments)
(Expenses)
(Commission)
= Profit/Loss before tax
(Tax payable)
= Profit/Loss after tax
(Dividends to shareholders)
= Shareholders’ retained profit

Question 2

Layout of a life company’s balance sheet

Answer 2

Assets

Share capital / Retained Profit
+ Reserves

Question 3

STEPS in product design and pricing

Answer 3

1) Formulation of structure of product
2) Decide on assumptions
3) Profit test to give premiums to meet a set profitability target
4) Given those assumptions, sensitivity test
5) Compare with competition
6) Run model office with expected tranche of new business

Question 4

List the basic information required on a proposal form

Answer 4

1) Personal information
2) Product information
3) Medical information
4) Financial information

Question 5

List the different parties in the insurance world

Answer 5

1) Existing policyholders
2) Future policyholders
3) Shareholders
4) Sales channels
5) Management
6) Marketing department
7) Actuarial department
8) Reinsurers
9) Competing life companies
10) Supervisory authorities
11) Taxation authorities
12) The government
13) Employees
14) Investment analysts

Question 6

Existing policyholders will ideally want…

Answer 6

1) Products that meet their requirements
2) Products that are easy to understand
3) Minimum hassle
4) Products that allow them to take advantage of any tax breaks
5) Large benefits for anygiven premium
6) Benefits on savings polices that keep pace with inflation
7) Maximum security of benefit:
- a large proportion of benefits guaranteed rather than discretionary
- financially strong companies
8) Value for money

Question 7

Future policyholders will ideally want…

Answer 7

1) Everything that existing policyholders want
2) A smooth sales interface
3) A large choice of insurance companies

Question 8

Shareholders will ideally want…

Answer 8

1) A return on investment of at least the RDD, ideally as high as possible
2) Low risk
3) Smooth supply of dividends
4) Useful financial information

Question 9

Salespeople will ideally want…

Answer 9

1) To maximise their remuneration
2) To provide a good service
3) To provide suitable products
4) To build up a portfolio of happy customers

Question 10

Management will ideally want…

Answer 10

1) To maximise long-term profits
2) To ensure the company complies with legislation and regulation

Question 11

The marketing department will ideally want…

Answer 11

To maximise new business levels

Question 12

The actuarial department will ideally want…

Answer 12

1) To conform to statutes and regulations
2) To conform to professional guidance
3) To work to a highly professional level
4) To work for the company to increase its profits
5) Possibly to maximize policyholders’ bonuses

Question 13

Competing life companies will try to outperfom each other by…

Answer 13

1) Lower premiums from a lower profit margin
2) Lower premiums from lower expenses
3) Better investment performance
4) Better administrative service
5) Quicker and simpler underwriting
6) Greater name awareness
7) Appeal to different target markets
8) Niche products
9) Product designs that are easier to understand
10) Higher bonuses for with-profits business
11) Greater security of policy benefits
12) Greater security of company
13) Greater incentivisation of sales channels
14) More incentives for policyholders

Question 14

Reinsurers will aim to maximise their long-term profits by…

Answer 14

1) Charging premiums which cover the cost of the inherent risk, with loadings for expenses and profits
2) Helping direct-writing companies reduce the cost of that inherent risk by providing underwriting advice and assistance
3) Attracting direct writers by offering high commission on proportional business ceded
4) Attracting direct writers by offering advice on pricing, underwriting and other areas
5) Attracting direct writers by demonstrating financial strength
6) Charging premiums which are competitive compared to other reinsurers
7) Charging premiums which are competitive with respect to the alternatives to reinsurance
8) Offering reinsurance and expertise for new risks

Question 15

Supervisory authorities will ideally want…

Answer 15

1) To ensurer insurers act in compliance with the law
2) To ensure insurers remain solvent in the future
3) To ensure policyholders are not mistreated
4) To ensure that customers are not misled

Question 16

Taxation authorities will ideally want…

Answer 16

To maximise tax income subject to what tax laws allow

Question 17

The government will ideally want…

Answer 17

1) To ensure that the legal framework maximises policyholder security
2) To incentivise products which are thought socially desirable
3) Possibly to assist policyholders of bankrupt companies
4) To encourage a fair and competitive marketplace

Question 18

The government may act in its own interest by…

Answer 18

1) Forcing life insurers to invest in large amounts of government bonds
2) Protecting the monopoly and profitability of any state insurer

Question 19

List the components of benefit payments

Answer 19

1) Maturities
2) Claims
3) Surrenders
4) Cash bonuses
5) Annuity instalments

Question 20

Aggregate asset share

Answer 20

Asset share calculations when carried out for:
- specified product lines
- the whole portfolio

OR

The sum of the individual asset shares

Question 21

Bancassurer

Answer 21

An insurance company that is a subsidiary of a bank or building society and whose primary market is the customer base of that bank or building society

Question 22

Bonus earning capacity

Answer 22

The rate(s) of bonus that a block of business can sustain over their future lifetime, on the basis of a set of assumptions about future experience

Question 23

List the scenarios in which questions of equity arise

Answer 23

1) The distribution of surplus
2) The determination of variable charges
3) The determination of surrender values
4) The determination of alteration terms
5) In unit pricing

Question 24

Estate

Answer 24

The estate of a life insurance company refers to the excess of assets over liabilities, both measured on a realistic basis

Question 25

Fair value reserve

Answer 25

A reserve calculated using fair value accounting principles e.g. a market consistent method of valuation

Question 26

Financial strength

Answer 26

This usually refers to the ability of a life insurance company to:
- withstand adverse changes in experience
- fulfill its new business plans
- meet the reasonable expectations of its policyholders
and is often measure by the level of free assets or estate

Question 27

Cryogenic genetic test

Answer 27

A tets that examines the structure of the chromosomes

Question 28

Molecular genetic test

Answer 28

A test that detects abnormal patterns in the DNA of specific genes

Question 29

Predictive genetic test

Answer 29

Taken prior to the appearance of the genetic condition in question, to determine the level of risk of developing certain diseases with an inherited component

Question 30

Diagnostic genetic test

Answer 30

Taken to confirm a diagnosis based on existing symptoms

Question 31

Marginal pricing

Answer 31

This refers to when a company decides, for competitive reasons, to price a contract ignoring any contribution to overheads

Question 32

Market-consistent value

Answer 32

The value at which the item under consideration could be exchanged in a sufficiently deep and liquid market, between knowledgeable and willing parties in an arm’s length transaction

Question 33

Mismatching reserve

Answer 33

A reserve that has been set up as a contingency reserve that may be called upon in the event of being unable to meet claims as they fall due

Question 34

PEC exclusion

Answer 34

Pre-existing Conditions exclusion

An exclusion used in non-underwritten healthcare contracts e.g. CI contracts.

Under the terms of such an exclusion, cover is not provided in respect of any of thr critical illnesses listed in the policy that the life insured has already suffered i.e. where the condition pre-existed at the commencement of cover.

It ia also usual to exclude cover for any critical illness where the life insured has previously suffered from a medical condition that gives a greater risk of that critical illnesses occurring.