Chapter 1-4: Life Insurance Products

Steps in the product life cycle

• Product Design

• Pricing

• Marketing and sales

• Underwriting

• Claims Management

• Experience Monitoring

• Valuation

Risks to Consider for life insurance products in general

• Mortality

• Withdrawal

• Investment

• Expense

• Longevity (savings)

• Anti-selection (and fraud)

• Selective Withdrawals

• Concentration of risk

General items that influence capital requirements

• Contract design

  • Initial reserve set up

  • How reserve grows over contract term

• Additional solvency margins

• Pricing vs reserving basis

• Frequency of premiums

• Initial expenses

• Options and guarantees

Definition of Endowment Assurance

• Payment on survival to end of term or earlier death in term.

• Can come in

  • Without profits

  • With profits (Increase SA, reduce premium, cash back)

  • Unit-linked

  • Group Form

Customer need for endowment assurance

• Usually savings, e.g.:

  • Repay loan

  • Retirement

  • Wealth transfer

• If death benefit is provided, also provides protection to dependants

Main risks of endowment assurances

• Investment returns

• Expenses

• Withdrawals (especially if asset share < 0)

• mortality (including anti-selection risk)

Definition of Whole Life Assurance

• No fixed term, pays on death

• No need for group version

Customer need for whole life assurance

• Long term protection of dependants:

• E.g., tax cover or funeral expenses

Main risks for whole life assurance

• Mortality (depends on entry age and duration)

• Investment (for non-linked)

• Withdrawals (selective withdrawals were good lives leave)

• Expense inflation (especially level premiums)

Definition of Term Assurance

• Pays benefit on death in fixed term

• Can be lump sum or income for specified period

• Can come in group form (e.g., life cover as part of benefit package)

• Can come with options:

  • Renew at end of term

  • Convert to other contract

  • Guaranteed terms

Customer need for term assurance

• Protection for dependants

• Cheapest form of cover

Main risks for term assurance

• Mortality

• Withdrawal

  • Significant selective withdrawal risk

  • So usually no surrender benefit

• Expenses

• Anti-selection risk

  • If options are offered

  • Because cheapest form of cover

Definition of an annuity

• Provides income for life or fixed period

• Purchased using single premium or stream of payments

• Can be immediate or deferred

  • For immediate: can cause capital strain due to supervisory reserves or minimum solvency margins

  • For deferred: high reserving requirements

  • Usually no surrender benefit for retirement related deferred (due to gov tax benefits / regulation)

• Specific example of annuities:

  • Joint life, first death: stop paying on first death

    • cheaper cover

  • Impaired life annuity

    • Less longevity risk so give higher payments

Customer need for annuity

• Protects the customer from overspending their personal income

• Retirement income (deferred annuity with regular stream of premiums)

• Payment of school fees

Main risks of annuity

• Longevity: lighter mortality than expected

• Investment

  • Reduced by matching assets and liabilities

• Expenses

• Anti-selection risk

  • Significant if withdrawal benefit is provided

• For deferred:

  • During deferred period: Mortality risk - depending on nature and size of death benefit

  • Can have additional risk if there are guaranteed terms for converting between income and lump sum

Definition of Unit-Linked Contract

• Contract where investment performance is based on portfolio chosen by policyholder

• Usually offers lower guarantees than non-linked

• Can be very capital efficient:

  • Depending on charging structure / ability to take credit for future initial expenses

  • By using actuarial funding or non-unit reserves

  • Can be constrained by regulation

Customer needs for unit-linked / index-linked

• Flexibility

  • Design

  • Level and range of benefits offered

• Long term savings

Main Risks

• Investment Risk

  • Passed to the policyholder but allows for smaller margins in pricing assumptions, so overall better deal for policyholder

  • Marketing / reputation risk for company if performance bad and policyholder did not understand this risk

• Expenses

• Withdrawal

  • If withdrawal benefit > asset share (which is definitely the case when asset share < 0)

• Mortality

• Risks to company are heavily dependant on guarantees offered

  • E.g., ability to adjust to adverse experience by increasing charges may be limited (due to marketing or regulation)

Definition of Index-Linked Contracts

• Contracts where policyholder returns are linked to an investment or economic index

Main Risks

• Investment

  • unable to match assets to index

  • Mismatching for profits

• Expenses

• Withdrawals

• Mortality

Risks of unit-linked / index-linked to policyholder

• Benefits do not meet need for originally intended for

  • Made worse by inflation eroding value of benefits

  • Unit-Linked provides greatest potential protection for inflation

  • Index-linked can guarantee inflation protection

• Premium and benefit flexibility

  • Unit-linked provides the best