Topic 1

Question 1

What’s an endowment assurance ?

Answer 1

A type of assurance that provides a benefit on survival to a specified maturity

Question 2

Reasons for purchasing an endowment assurance

Answer 2

A savings vehicle; to provide lump sum on retirement
Provide protection for dependents; contract has a significant death benefit on the death of life assured b4 maturity date
Pay off an interest only mortgage

Question 3

Endowment assurance contracts are available on the following basis;

Answer 3

Non profit
with - profit
Unit- linked

Question 4

Non profit endowment

Answer 4

Provides a guaranteed sum assured at maturity, in return for regular premium payments throughout the contract/ a single premium @ the start of a contract

Question 5

With-profit endowment

Answer 5

Entitles the p/holder to a share of the profits made by the company during the term of the contract

Profits distributed regularly ( on an annual basis) by payment of bonuses to the p/holder

Question 6

Unit -linked endowment

Answer 6

Premiums paid by the p/holder are used to purchase units in a pooled investment fund

Benefit payable depends on the no. of units held and current bud value of the units ( determined by market value of the underlying asset) & charges levied by the insurance company.

Question 7

Unitised with-profit contract

Answer 7

Hybrid product where units are invested in the insurer’s with-profits fund

Question 8

In a UWP contract;

Answer 8

Price of units - fixed & bonus declared - used to purchase additional units
OR
No. of units - fixed & unit price increased to reflect bonus rate

Question 9

Main advantage of UWP over the conventional with- profit

Answer 9

P/holders find them fairer and easier to understand since bonus is related to the accumulated fund ( premiums paid to date + previous bonuses) rather than sum assured

Question 10

Risks faced when having the endowment assurance contract;

Answer 10

Investment risk - savings nature of the contract introduces this risk for both the company and the p/holder . Extent of the risk depends on the type of endowment contract ( non-profit , with- profit and unit-linked )

Question 11

Investment risk

Answer 11

Risk that the actual investment return is less than expected

Question 12

How does the nature of the contract affect the level of investment risk borne by the insurer ?

Answer 12

Non-profit- Risk is high
With-profit - Risk is medium or average; if actual returns are low then bonuses can be reduced
Unit-linked- low risk since investment risk is borne by the policyholder

Question 13

How might investment risk be controlled ?

Answer 13

Invest in assets that match the nature , term and currency of the liabilities eg fixed income assets for guaranteed benefits and real assets for discretionary benefits.

Question 14

Mortality risk

Answer 14

The risk that actual mortality experience is worse than expected

Level of death benefit will determine the extent of the mortality risk faced by the insurer

Question 15

Levels of mortality risk with different contracts

Answer 15

Contract with no death benefit ( maturity benefit larger than other benefit) - insurer faces longevity risk ( more p/holders survive to maturity than expected )

Death benefit as a return of premiums - mortality risk insignificant apart from near the start of the contract

Contract pays a large death benefit ( equal to the maturity benefit ) - insurer faces significant mortality risk ( @ early durations ) - insurer faces a loss if more p/holders dies in a given year than expected.

Question 16

Why does mortality risk decrease as the in- force duration increases?

Answer 16

The sum at risk(benefit - life fund ) reduces over time as fund is built up

Question 17

Control of mortality risk

Answer 17

Underwriting to identify lives in below- average health
Charge higher premium for impaired lives / decline cover
Limit the death benefit to return of premiums / apply a waiting period eg 2 years

Question 18

Anti- selection risk

Answer 18

Associated with mortality risk
Risk that the individual believes that his/ her own risk level is higher than allowed for by the insurance company

Question 19

Why might anti-selection risk associated with mortality risk be not that significant?

Answer 19

An individual in poor health will be better off purchasing term assurance

Question 20

Expense risk

Answer 20

Risk that actual expenses incurred are greater than those assumed when writing a business.

Question 21

Why might the actual level of expenses be greater than that assumed ?

Answer 21

Higher than expected expense inflation
Lower volumes of sales over which to recover fixed costs
Lower investment returns , thus lower management charge on unit -linked business

Question 22

Withdrawal risk

Answer 22

Risk that the withdrawal benefit is higher than the asset share

Question 23

What is asset share ?

Answer 23

Accumulation of premiums paid to date- expenses incurred- cost of cover

Question 24

Withdrawal risk may likely be highest at early durations when asset share is negative. Why?

Answer 24

High initial expenses( commission and underwriting)+ cost of setting up statutory reserves ( can exceed initial premium)

Question 25

What is the New Business Strain?

Answer 25

The amount of initial capital required

Question 26

Factors affecting the initial capital required to write a contract ;

Answer 26

Level of initial expenses ( including initial commission) - the greater the level of initial expenses , the greater the initial capital required

R/ship btwn the pricing and supervisory reserving bases - in practice, statutory reserving basis > the pricing basis
The greater the difference btwn pricing and supervisory reserving basis , the greater the initial capital required

Contract design
the higher the levels of guarantees implicit in the contract, the higher the initial statutory reserve & hence the larger the initial capital requirement

Premium payment frequency
initial capital requirement increases as the frequency of premium payment increases
higher frequency means a low initial premium

Question 27

Whole life assurance

Answer 27

Provides a benefit on the death of the insured life , whenever that might occur

General purpose contract for providing long-term protection against a financial loss to the dependents on the death of the insured

Question 28

Most whole life assurance contracts tend to be non- profit in nature . Why?

Answer 28

It is a protection contract and as such , the policyholder will not benefit from sharing investment risk

Question 29

An early death exclusion may be applied on death in the first two years . Advantage? Disadvantage?

Answer 29

Advantage
Simple , reduces underwriting , cheaper , increased marketability, reduced anti- selection risk

Disadvantage
May create dissatisfaction and reputational risk

Question 30

Some features may be added to the whole life assurance policy;

Answer 30

Surrender value - available but would be restricted to the policy being in-force for at least 2 years to discourage withdrawals and anti-selection

Premium protection option- payment of premiums continues in case the p/holder is unable to continue with premium payment due to specified disability, critical illness or retrenchment.

Question 31

What will determine the significance of the investment and mortality risks ?

Answer 31

Age at entry
In- force duration of the contract

Question 32

Other risks faced in the possession of a whole life assurance contract

Answer 32

Expense risk- significant expense risk- higher expected inflation. Particularly significant for contracts with a long current in- force duration

Question 33

Why? ( previous question)

Answer 33

Expense loading in in-force products with long current durations may be very different to expenses actually being incurred now eg due to expense inflation

Question 34

Withdrawal risk ( Whole life assurance )

Answer 34

Possible @ early durations when the earned asset share is negative . Company could mitigate this by ;
Applying waiting periods
Surrender penalties
Commission clawbacks

Question 35

Main factors affecting initial capital requirements for whole life assurance contracts ;

Answer 35

Level of initial expenses ( commission and underwriting )
R/ship between pricing and statutory reserving bases
contract design eg level of implicit guarantees
Frequency of premium payment