Units Linked And Accumulating With-Profit ContractsVn

Question 1

The main features of a non-unitised accumulating with profits contract

Answer 1

• The benefits take the form of an accumulating fund of premiums
•The fund accumulates with interest
—> Where the interest rate may be partly guaranteed
—> With the remainder being discretionary “bonus” interest which can vary over time
—> The bonus will reflect both the returns achieved on the underlying assets over the period plus any additional profits made on the contract in this time.
—> Interest rates cannot be negative
—> They will reflect the underlying profits made by the insurer (including investment profits)
—> But will be smoothed over time so as to produce a more stable progression compared to the underlying asset returns
• the accumulating fund at time t is denoted by Ft, the simplest form of a AWP contract follows the following recursive formula Ft=(F(t-1)+P)(1+b)
• On death or maturity a terminal bonus can be paid out in addition to the accumulated fund value at the discretion of the insurance company

Question 2

Unit fund

Answer 2

• the total value of the units in respect of the policy and any time
• belongs to the policyholder
• this fund keeps track of the premiums allocated to units and the benefits payable from this fund to policyholders are denominated in these units
• this fund is normally subject to unit fund charges

Question 3

Non unit fund

Answer 3

• belongs to the company
• this fund keeps track of premiums paid by the policyholder which are not allocated to units together with unit fund charges from the unit fund
• company expenses will be charged to this fund together with other benefits above the available unit fund that are payable to policyholders

Question 4

The profit vector

Answer 4

an array of the expected year-end profits for policies which are still in force at the start of each year.

Question 5

The profit signature

Answer 5

an array of the expected year end profits allowing for survivorship from the start of the contract.

Question 6

unit linked assurances

Answer 6

• have benefits which are directly linked to the value of the underlying investments.
• Each policyholder receives the value of the units allocated to the policy. There is no pooling of investments or allocation of the pooled surplus.
•As each premium is paid, a specified proportion (the ‘allocation percentage’) is invested in an investment fund chosen by the policyholder. The investment fund is divided into units which are priced continuously.
• the value at the date of death or maturity of the cumulative number of units purchased is the sum assured under the policy
• some may offer guaranteed benefits

Question 7

Bid price

Answer 7

The cash-in value of each unit

Question 8

Offer price

Answer 8

The price that has to be paid to purchase a unit in the unit fund

Question 9

Bid-offer spread

Answer 9

Money that the insurance company makes from each units purchased and which helps cover its costs and enable it to make profits

Question 10

The principle of an insurance policy being “self-funding”

Answer 10

The premiums collected from policyholders should be sufficient to cover the claims, expenses, and other costs associated with providing the insurance cover. In other words, the insurance company should be able to pay for its liabilities (future claims), operational costs, and maintain its financial stability using the premiums it receives and initial reserves set up from its customers without relying on EXTERNAL FUNDING or other sources of income.
The self-funding requirement mean that insurance company would need to SET UP RESERVES.
Reserves are typically invested more conservatively meaning that overall profitability would likely be reduced.