F102 application

Group products can arise where

• the employer pays the whole premium on behalf of the employees

• where the cost is shared between the two parties ( the employer must pay part or all of the employee cost but the member must pay for any coverage desired for spouse or children)

• where the employer facilitates with payroll deduction but the employee pays all costs)

• where the ‘group’ is not employment based but linked to club membership (Affinity groups) or credit cards).

endowment assurance

• Endowment assurance:

  • Surrender values for endowment assurances usually increase over the term of the contract

  • Means of transferring wealth 

  • Means of repaying the capital on an interest-only loan.

  • Vehicle for saving money for retirement

  • Without-profits, with-profits or unit-linked

investment risk

The savings nature of the contract introduces an investment risk, the extent of which depends on whether the contract is unit-linked, index-linked, without-profits or with-profits.

Mortality risk

The nature of the death benefit provided will determine whether there is a mortality risk and the nature of that risk. Possible approaches include:

A significant benefit, for example a without-profits contract where the benefit on death equals that payable on survival. There will be a significant mortality risk at the start of the contract, but this will reduce as duration in force increases.

Associated with this mortality risk will be an anti-selection risk. The extent of this risk will depend on the extent of the actual, or perceived, choice the policyholder had in effecting the contract.

return of premiums or ‘fund’. The mortaltiy risk is likely to be insignificant except near the start of the contract.

no death benefit. Here there will be a longevity risk, the significance of which will increase with duration in force.

expense risk

there is expense risk in that the actual marginal costs of administering the contract need to be met.

perisistency risk

Persistency risk is the risk that the number of withdrawals is different to that expected. Withdrawals could include not only surrenders and lapses, but also partial withdrawals and paid-up policies.

At times when the asset share is negative, there is a financial risk from withdrawal. At other times, whether there is such a risk depends on how any withdrawal benefit paid compares with the asset share.

capital requirements

• design of the contract

• frequency of payment of the premium

• relationship between the pricing and supervisory reserving basis

• additional solvency capital requiremetns

• level of initial expenses

main risk of endowment assurances

• investment returns

• expenses

• withdrawals

• mortality

whole life assurances

at times when the asset share is negative , there is financial risk from withdrawals. At other times, whtether tehre is such a risk depends on how any withdrawal beenfit paid comapres with the asset share.

decreasing term assurance

A decreasing term assurance can be used to meet two specific such needs. First, it can be used to repay the balance outstanding under a repayment loan and, secondly, it can be used to provide an income for a family with children until such time as the children can provide for themselves.

renewable and convertible term assurances

For individuals, these contracts combine the attractions of a term assurance, in terms of obtaining low-cost death cover, with the certainty of being able either to convert to a permanent form of contract, ie an endowment or whole life assurance, when it can be afforded or to renew the original contract for a further period of years, all without health evidence being provided (unless the benefit level is increased).

Surrender values would not normally be paid pre-conversion

immediate annuity

An immediate annuity is a contract to pay out regular amounts of benefit provided the life insured is alive at the time of payment. The word “immediate” indicates that the contract starts payments immediately, without a deferred period. Payments may be made in advance or in arrears, so that the maximum period until the first payment is the frequency period of payment

deferred annuity contracts

A deferred annuity is a contract to pay out regular amounts of benefit provided the life insured is alive at the end of the deferred period (the “vesting” date) when payments commence, and subsequently alive at the future times of payment.

As there is a deferred period, regular or single premiums may be payable up to the vesting date

conventional with-out profits

this is the oldest form of writing insurance contracts, characterised by fully guaranteed benefits and, usually, level regular premiums (except for immediate annuities, which would generally be paid for by single premium)

with-profits

a policy where the policyholder has an entitlement to part or all of any future surplus which arises under the contract (or more widely to share in surplus arising within the with-profits fund). The policy may be “conventional with-profits” or “accumulating with-profits”. The difference between the two is characterised by how bonuses are added to the policies - see Chapter 9

unit-linked

a policy where the benefits are linked directly to the investment performance of a specified fund, and characterised by a lower level of guarantees on benefits and premiums

index-linked

a policy where the ebenfits are linked directly to a specified invesmtnet index or econmic index and are guarnateed to move in line with the performance of that index

type of basis in terms of profit implications fro

the cost of the product and the risks of the product to the PH

the amount of flexibiliyt that is possible in the product design

the risks of the product to the isnraune company, including capital requiremetns and the potential for profits

typical basis in terms of profits

term assurances- conventiaonl without-profit basis

whole life and endowment assurances may be written on conventional without profits, with-profits, unit linked and index-linked

although new conventioanl withouts profits is are in some markets

conventional without profits whole life assurances are common in SA.

annuitites tend mainly to be wirren on a conentiaonl without prfit basis though they cna also be index linked

bid-offer spreac

difference between the price at which the insurance company sells the units (the offer price) and that at which it will buy them back (the bid price). (

Charges deducted from premiums

allocation rate being less than 100%

bid-offer spread

fixed amount

charges deducted from unit funds

• % of fund value taken on a regular basis- regaulr fund charge/fund management charge

• a regular fixed charge

• regualr charges taken to cover risk benefits in excess of the vfalue of the unit funds

methods that initial expenses can be paid for under unit-linked contracts

• very low or zero allocation rate

• modelartion reduced allocation rate

• high regular fund charge

charges vs actual costs

charges are what the company asks the PH to pay

actual costs are what the company has to pay for

replacement ratio

The replacement ratio is usually defined as the ratio of post-claim income to pre–claim income, in both cases net of income taxes. The actual replacement ratio will vary depending on salary and individual circumstances.

The level of the replacement ratio is usually seen as a critical indicator of likely claim experience; the higher the replacement ratio, the lower the incentive to return to work and the worse the morbidity experience is likely to be. Some sources have suggested that, over some ranges, a 1% increase in the replacement ratio might mean a 1% increase in the expected cost of claims.

over-insurance

higher than appropriate replacement ratio

• over-insurance from outset

• subsequent over-insurance, through salary not keeping up with benefits

• a reduction in the tax levied on IP claims, applying to existing PHs

• multiple policies or recipet of other non-disclosed sources of income

ways to address over-insurance

• an approrpiate maximum beenfit formula at point of sale

  • e.g. max replace ment ratio

  • more stringent limitattions for higher salaries in excess of specified limits

  • an overall maximum benefit limit

  • deductions for any other benefits - such as state benefits - that the PH might be receiving while unable to work

• quality training of those conduction the sale, reducing the incentive to over-insure

• regular reviews to ensure that the level of benefit remains appropriate

• clear policy conditions highlighting the likely action at the claims stage in event of over-insurance

• will address issues at the claim stage

waiitng period

period after commencement of the policy during whcih beenfits will not be paid

deferred period

an insurer will nto usually pay beenfits duringthe first few eweks of sickenss.

main reason for nto having a non-zero deferred periods are :

• integrate with employer-supplied benefits

• to reduce the cost of claims to the insurer and there for the price (prem)

• to reduce the insurer’s administration costs and therefor the price

• to meet true custoemr needs';

there are split deferred policy

linked claims period

waive the deferred period if sickness recurs wihin sat 26 or 52 weeks

critical illness

based on the fianosis of a certain number of headline diseases or on the occurrence of a number of dreaded surgical procedures

cutsomters needs of CI

• income can be provided from the lump sum via an annuity when the idnicvidual cannot work as a result of his critical illness

• the benefit can be designed to repay a mortgage or other loan whe nthe PH health is in question following diagnosis of a critical illness

• medical costs can be funded when the CI requries surgery or other expensive treatment

• business partners can purchase CI policies on the lives of each other such that the benefits wil lfund the buyout of the stake in the partnership when CI arises aka keyman cover

• a change of lifestyle can be funded where necessary to improve the claimants health

• other needs suggested inlcude recuperation after illness, taxation planning, medical aids

aims of CI

attmpes to overcome soem of the complexity of other health related productes by providing a fixed sum insured on certain pre-defiend events

1. the lump sum payout which cannot subsequentlyb withdrawn by the insurer has apowrful draw for purchases who are wary of insurers’ promises to look afte them

2. the claims trigger of adisnosis or procedure is easy to explain and adds to the attraction fo the product

different defitnitions for critical conditsion between insurers in the same market, whether for maketing or cultural reasons, which can complicate claism acceptance. although in some terrirotires work has been donw to stadnardise definitions

more severe requirements on the condition covered than the colloquial understanding of the term used in the headlien title of the condition

characteristics of isnurable conditions

• it is a condition perceived by the public to be serious and to occur frequently

• each condition covered can be defiend clearly so that there is not ambiguity at time of cliam

• sufficinet data are available to price the benefit

sample list of major conditions

• cancer

• coronary artery by-pass surgery

• heart attack

• kidney failure

• major organ transplant

• multiple sclerosis

• stroke

core conditions for the SA market

• heart attack

• cancer

• stroke

• Coronary Artery By-pass graft (CABG)

stnadardised assessment critieria for a stroke for SA CI policies include

bowel status

bladder status

grooming

stairs

Other conditiosn for CI

-alzheimer’s disease

• aids/HIV contracted by blood transfusion

• AIDS/HIV contracted during occupation

• aorta graft surgery

• benign brain tumour

• blindness

• coma

• deafness

• heart valve replacement or repair

• loss of limbs

• loss of speech

• motor neuorne disease

• paralysis/paraplegia

• parkinson’s disease

• third degree burns

extra conditions

• chronic emphysema

• diabetes

• pre-senile dementia

• rhuematoid arthiritis

• 
  

terminal illness

ensures that all conditions that significantly recue life expecatncy are covered, albeit at a late stage. Many perceive this as an equitable benefit.

reason for offering tiered benefits

the CI produce becomes more comprehensive; a beenfit is offered at levels of disease progression that owuld not have triggered payment under a more standard CI contract

the paymetns, part or whole, more closely mathc to medical distress and financial need, reducing the incentive for anti-selection and for exaggeration of symptions at the claims stage

multiple c laims are possible , which enhances PH satisfaction and retention

as a variante on the standard product, it also permits the isnurer to differentiate itself from its competitors

it makes comparisons more difficult and the insurer’s product potentially more profitable. alterantively , the complexity of hte tiered beenfit products may reduce its appeal to the prospective PH or to his/her fianncial adviser

higher degree for claims disputes

windfall claims

It could be the case that the cash benefit under CI can represent a genuine windfall to the policyholder, in that the amount of money produced can far outweigh the medical costs or the longer term damage to quality of life (although this is inherently difficult to quantify, and some policyholders may deem any such damage to be worthy of a very high compensation). In this way, it is not directly related to needs. This can cause anti-selection problems and conflicts with one of the basic principles of insurance: the matching of loss to benefit.

The

definitions of disabiliyt

• occupation-based

• realted to ADLs

• definitions using working activities or functional abilities

requireemns for a group scheme for a CI product

there is a definition of who is eligble for beenfits udner the scheme

• the benefits under the scheme are clearly defined:

  • by size

  • by definition of a valid claim

  • by the period of benefit

Long term care insurance

all forms of continuing personal or nursing care and associated domestic services for people wh oare unable to look after themselves without some degree of support, whether provided in their own homes, at a day centre, or in a state-sponsored or care-home setting

the costs of care can be divided between living costs, housing costs and personal care. These might be defined as:

living costs- food, clothing, heating and amentities

housing costs - rent, mortgage payments and council tax

personal care care- the additional costs of being looked after, arising from frailty or disability

the housing costs are often referred to as the hotel or accommodation element of the total costs.

personal care inlcudes all forms of care directly involving touching a person’s body, incorporationg issues of intimacy, personal dignity and confidentialy. This itself should be seperated into nursing care and other forms of personal care

Intermediate care

This focuses on recuperative serivices following an acute event in order to reduce avoidable Hospital admission and minimize dependence on ongoing long-term care

Pre-funded plans for LTCI

• Purchased by relatively healthy people to protect them against the future risk of disability

• Secured by a single perm or level annual premiums paid throughout life or until a specific age with a premium waiver when a claim is being paid

Immediate needs plan for LTCI

• purchased by long-term care claimants to protect them against uncertain survival duration

• They are impaired life annuities secured by a single prem paid at the start of the contract when the insurers needs care as a result of failing health

Product structures for LTCI pre-funded plans

• Long term care benefits can be added to a CI policy

  • Structure so that the definition of TPD changes from occupation related to the loss of independent existence

• Long term care benefits can be provided as a rider on a whole of life insurance

  • Pays sum assured on death or accelerates a fixed % of the benefit when the long term care criteria are satisfied

• LTCI can be added to an IP policy so that the cover continuers beyond normal retirement ag.

  • At the end of the IP term, the definition of disability would normally switch from being occupation related to one that is activity related

Method of funding LTCI

• singe payments

• Regular payments

  • Regular press almost always escalate in line with the chosen benefit escalation rate and include a waiver of premiums on triggering the disability benefit or possibly a less severe level of disability

• A restricted regular payments that either stop:

  • At a certain age

  • During a defined level of disability

• Retrospective payment from the equity released after the sale of the home

Unit linked for LTCI cash flows

Cash flows

1. PH pays a premium

2. Prem goes to buy units and also into the insurer’s non-unit fund

3. Regular charges are made from the unit fund by either cancelling units or reducing the unit price

   1. Risk charges used to cover any protection offered by the contract

   2. Fund management charges

   3. Policy admin charges

   4. A bid-offer spread

4. Expenses that the insurer will pay out of the non-unit fund

5. Benefit paid on death or surrender benefits will typically be the bid value of the units and paid out of the of the unit unless there is guaranteed death benefit which is in excess of the unit fund in which case there will also be a payout of the unit fund

6. Long-term care benefits will be paid primarily out of the non-unit fund

Guarantees of a LTCI

Plans can offer different levels of guarantees before the insurance claim is triggered

• no guarantee that the single premium would be sufficient to provide long-term care protection

• Protection from a fixed age e.g. 90 - fund will be positive at age 90 , no further risk prems are drawn

• A full guarantee so that the insurer accepts the risk of fund exhaustion - remain insured force until unit fund is exhausted.

Choice of long term care insurance claims triggers that afford different levels of fund protection

• protecting the entire investment fund

• Protecting the initial investment

• Allowing the entire fund to be exhausted

• Different periods to be aware of

  • Differed period that the ph chooses at outset which is fixed

  • The period during which long-term care benefits are paid out of the unit fund- depends on size of the fund at the time of claiming and the level of the benefits

  • The period during which long-term care benefits are paid out of the non-unit fund

Immediate needs LTCI

Deaths benefit structure

• minimum payment period

• By amortizing the single premium

• By providing capital protection of part of the single premium

The higher the level of death benefit selected the less impact the PH’s health status will have on the premium

Asset shares

Used for with profit contracts and sometimes without profits

AKAA earned asset shares can be evaluated for individual policies or for a block of policies issued with similar terms and conditions

Generic level: accumulation of monies less monies out. Accumulated cashflow

It is the accumulation of premiums less deductions associated with the contract ( plus for with profits policies an allocation of profits on without profits business if appropriate) all accumulated at the actual rate of return earned in investments

Asset share will over a period of time and allowing for smoothing be the upper limit on a policy’s surrender value.

Deductions for asset shares

All expenditure associated with the contracts in particular

• commission paid and expenses incurred (net of tax, if appropriate)

• The cost of providing all benefits in excess of asset shares

• Tax on investment income (if appropriate ) including any reserves made for future tax liabilities

• Transfer of profit to shareholders

• The costs of any capital necessary to support contracts in the early years

• A contribution to the undistributed surplus in the with-profits ph fund which in turn support the smoothing of bonuses and the ability to exercise greater investment flexibility

Possible ways of distributing profits to with-profits policyholders

• cash bonus

• Premium reduction

• Benefit increase

Increase in bonuses

• regular reversionary bonuses added through out the contract term

• A special reversionary bonus added as a one off from time to time

• A terminal bonus paid when the contract reaches maturity and possibly also on death or surrender

Regular reversionary bonus

Declared on a regular basis usually each year throughout the lifetime of a contract. Once it is declared it becomes attached to the basic benefits and is guaranteed

Amount can be calculated 3 ways:

• simple - bonus is expressed as a% of the basic benefit under the contract

• Compound the bonus is expressed as a % of the basic benefit plus any already attaching bonuses

• Super compound - the bonus is expressed in terms of a two %s:

  • One applied to the basic benefit and a second applied to any already attaching bonuses, where this method is used the 2nd % is typically higher than the first

Terminal bonuses specification

• a % - possible varying by duration in force and original term of contract - of total attaching reversionary bonuses, including any special reversionary bonuses

• % of the total claim amount before additional of terminal bonus with the percentage varying according to duration in force

Accumulating with-profits

With-profits to which bonuses are added annually in relation to the premiums payable to date plus previously declared bonuse. A terminal bonus may be added when the policy becomes a claim on maturity, death or surrender

Unitised with profits contract

• the price of a unit remains constant. The company allocates additional units to each contracts usually annually at the bonus declaration, these are made up of a guaranteed addition, which could be zero and a bonus addition which could also be zero especially if there are guaranteed additions, the number of bonus units is determined at the discretion of the company

• The company, instead of allocation additionally units changes the price of a unit usually on a daily basis, the increase is made up of a guaranteed part (possibly zero) and a bonus part.

Under both methods, these bonus additional are akin to the regular bonus given to a conventional with-profits contract. When the insured event happens, the company may add a terminal bonus to the bid price of the units

MVA market value adjustment

For unitised accumulating with profits contracts, the surrender value will usually be defined in a similar way but the company may also retain the right to apply a market value reduction (MVR), these size of the adjustment is determined at the discretion of the company.

Such an adjustment may also apply in the case of a non-unitisng accumulating with-profits contract, depending upon what the policy conditions say regarding any benefit that might be available on early termination of a contract.

Charges for a unit-linked business may be a combination of:

• policy charge or fee taken from either the premium or the fund

• Percentage allocation during an initial period

• A different percentage allocation after the initial period

• Bid-offer spread

• Charge for risk benefits

• Annual management charge

Alternatively the charges could be taken implicitly through the bonus rate, with no explicit charging structure

Revalortisation method

This method is used in parts of continual Europe

The profit or surplus to be given to a particular contract is expressed as % of that contract ‘s supervisory reserve. The benefit under the contact and the premium payable by the PH are then increased by the same amount

Divide profit into savings and insurance profit

The savings profit represents the profit from the assets and can be distributed in whole or in part by the revalortisation method

The insurance profit is that arising from actual experience being better than expected for all sources of profit other than the return on the assets. The profit might then typically be retained by the company for the distribution to shareholders as a reward for the pure instance risks that they have borne

Advantages of revaloritsation methods

• Simple to apply

• The method codifies exactly how a company should declare part of its profits as bonus to with profits phs. Very little judgement is normally required and should therefore be relatively cheap to administer

• The exception to the above is where PHs do take a share of the insurance profit: one off profits or losses are usually spread over a period of time and judgment might be needed to determine how best this should be done

• Having a codified method generally protects PHs from ungenerous life insurance companies

• By taking assets at book values, including appropriately smoothed writing up or writing down adjustments, a smooth emergence of investment profit is usually achieved.

Disadvantage of revalorsiation methods

• the company has not discretion in its profits distribution except to the extent of spreading of one-off costs where applicable.

• The method tends to discourage equity investment. This is because of the fact that there is no deferral of profit distribution. This means that all investment losses would be bourne by the company and would constitute an unacceptable insolvency risk. There would also be a problem regarding the treatment of unrealized gains, which are not easy to distribute directly under current revalroisaiton systems

• Versions that do not share insurance profit with the PHs go against the principal of mutuality.

• It is not very easy to explain to PHs with constant premium polices who see very small additions to their guaranteed benefits early in the policy term

Contribution method

Method evolved in the United States

The principle that underlines this approach is that distributable surplus should be distributed among policies in the same proportion as those policies are judged to have contributed to surplus

Policyholder expectations in terms of benefit distribution

• documentation issued by the life insurance company

• The company’s actual past practice

• The general practice in the life insurance market

Distribution channels

• insurance intermediaries who select products for their clients from all or most of those available on the market

• Tied agents who offer the products of life insurance company or a small number of life insurance companies

• Own sales force usually employed by a particular company to sell its products direct to the public

• Direct marketing via press advertising over the telephone, internet or mailshots

Insurance intermediaries

Are salespeople who must act independently of any particular life insurance company although they can be owned by one. Their aim is to find the best contract in terms of benefits and premiums for their clients. They may be remunerated via commission payments by the companies whose products they sell, or they may alternatively receive a fee from their clients.

It will often be the client who initiates the sale. However intermediaries are also likely to promote themselves actively to existing clients.

Alternative names of insurance intermediaries are independent financial advisers IFAs and insurance brokers

Tied agents

Sales people who are tied to one or sometimes several life insurance companies that is they offer to their clients only the products of those companies. Typically they may be the employees of a bank or other similar financial institutions.

Where the tie is to more than one company, it will sometimes be the case that the product ranges of the companies are mutually exclusive but more often there will be an overlap,

Tied agents are remunerated by the companies to which they are tied, the remuneration could be in the format of commission payments or by salary plus bonuses.

It will often be the client who will initiate the sale but some tied agents may actively engage in selling

Own sales force

Usually employees of a life insurance company and hence will only sell the products of that company. They may be remunerated by commission or salary or a mixture of both.

It will usually be the salesperson who initiates a sale, making sue of client lists. However, once the salesperson has built up a rapport with particular client, it will then often be the latter who initiates further sales.

Direct marketing

• mail shots - insurer initiates the sale

• Telephone selling - either PH or insurer that initiates

• Press advertising

• Internet selling

Demographic profile

Level of financial sophistication and level of income

Legal environment

Care needs to be taken in the areas of the contract where the insurer has discretion

• some principle related to PRE acting unfavorably to the office

• Unfair contract terms voiding clauses of the contract

Common typers of regulatory restrictions

• a restriction on the typers of contract that a life insurance company can offer

• Restriction on the premium rates or charges that can be used for some types of contracts

• Restriction on rating factors that can be used to calculate premiums for example age or gender

• Requirements relating to the terms and conditions of the contracts offered e.g. with regard to how paid-up policy and surrender values are to be calculated.

• Restrictions not the channeled through which life insurance may be sold or requirements as to the procedures to be followed or the information required to be given as part of the selling process

• Restrictions on the ability to underwrit for example a prohibition on the use of the results of genetic testing or to differentiate between different classes of PH e.g. males and females

• An indirect constraint on the amount of business that may be written.

• The regulatory framework within a country may limit what company would like to do in terms of investment, there may be restrictions on:

  • The types of assets in which a life insurance company can invest

  • The amount of natural particular type of asset that can be taken into account for the purpose of demonstrating solvency

  • The extent to which mismatching is allowed at all

• Regulatory requirement for mismatching

Climate change and the regulatory environment

• consider climate risks in existing business planning, investment management and risk management processes

• Effectively disclose and report on climate-related risks and opportunities

• Adopt a consistent and reliable means of assessing pricing and managing climate -related risks.

Fiscal regime and approaches to taxation

• a tax on the annual profits of the business where broadly profits means the excess of the change in the value of the assets over the change in the value of the liabilities

• Tax payable on investment income less some or all of the operating expenses of the company

• There may be tax on premium income

Overall attractiveness of a life insurance product compared with other products depends on a combination of:

• the taxation treatment of premiums paid, in particular whether premiums are deductible from the individual’s taxable income in full in part or not at all

• The taxation of the life insurer’s funds during the life of the contract and

• The taxation treatment of the eventual policy benefits

Why is internal data inadequate

• there may be missing data

• The data may be inaccurate

• There may not be enough for credibiliy

Data issues for health and care contracts

• smaller policy volumes (CI and LTCI) and lower incidences rates (IP and CI) limits the credibility of available data

• Changes to products and markets over time limits the applicability of past insurer data

• Heterogeneity of products and markets limits the applicability of industry data.

Three risks associated with mortality assumptions

• a model risk that the model typically a probability distribution chosen to represent future mortality may not be appropriate

• A parameter risk that the parameters used with the model may not adequately reflect the future experience of the class of lives insured ro to be insured event though the underlying model may be appropriate

• A random fluctuations risk that the actual future experience may not correspond with the model and parameters adopted even though these adequately reflect the class of lives insured to insured

  • Most likely to arise if the numbers exposed to risk are not large enough for the law of large numbers to apply

Key things about withdrawal risk

• the financial risk that the surrender value is higher than the asset share at the time of withdrawal. This risk will often be made worse by the mismatching of the initial expenses and the charges made to recoup those expenses

• The risk of mortality experience due to the selective effect of withdrawals

• The risk of increasing the per policy fixed expenses due to the loss of business volume from withdrawals

Change in mix of nature

By :

• class of business

• Type of contract

• Contract design

• Premium frequency

Also by source

Impact of competition

Decisions to increase risk profile for competitions

• reduce premium rates or charges under new business contracts

• Offer additionally guarantees and options under new business contracts

• Increase bonuses under existing contracts

• Increase salaries or commission in the respective distribution channels

• On existing business with reviewable charges, either do not increase the charges or reduce their rate of growth relative to what may have been intended originally

Directors legal responsibility

• make decisions affecting the running of a company

• Implores proper systems of management and control on the financial operations of the company

Actions of distributors

Take actions in their own interest which can increase risk profile. Especially if they are independent of the company

• encouraging business to lapses and re-enter where there are not exit penalties or there is not clawback of commission payments- the earlier this occurs in the life of a policy, generally the greater the loss for the life company

• Taking advantage of loopholes in product design

• Taking advantage of opportunities that arise due to timing effects in unit pricing practicines

Failure of controls

• financial losses for the insurer

• Regulartory intervention

• Reputational damage

Examples of counterparty risk

• reinsurance agreements - reinsurer default

• Outsourcing arrangements e.g. poor quality service from a company providing outsourced administration services

• Corporate bonds held as investments e.g. non-payment of coupons and or capital by the issuing entity

• Disitrbution arrangements e.g. non-recovery of broker balances.

Fraud

A general type of control failure caused by deliberate intent of one or more parties is fraud

Amin parties who might perpetrate fraud are:

• directors or staff these parties will have special access to the financial systems of the insurer and to the computer programs and a data which support the business

• Policyholders - the main risk here relates to fraudulent claims, the risk increasing in proportion to the difficult in of detection. Counties with secure processes for certifying deaths represent reduced risks

• Other outside parties -such parties may effectively obtain some access to the computer systems of the insurer, particularly where there’s re external components such as website access

Climate change risks

• physical climate risk are the first-order effects of environmental changes such as a greenhouse emissions, pollutions and land use. An examples of physical climate risks could be an increase in mortality or morbidity in an insured population due to global warming or pollution

• Transition risks refer to economic, political and market changes as a result of efforts to mitigate climate change. An examples of climate transition risks could be policy changes designed to reduce fossil fuel consumption ( e.g. taxes, subsidies, limitations) resulting in investments in fossil fuels and carbon-intensive industries losing value

• Climate liability risks can aspire from injured parties seeking compensation for the impacts of climate change. An examples of climate liablity risks could be a link established between air pollution and adverse health conditions, resulting in a new class of latent claims.

Aims of the insurance company

• maximize the profits of the company, whether these go to shareholders or with-profits PHs

• Maximize the return that the company achieves on its available capital.

Overall insurer risk can be measured against the above aims but also allowing for:

• The capital and other resources available to the insurer

• The cost of failing to meet the public interest need, as usually expressed in insurance supervisory legislation, for the company to avoid insolvency

• The cost of failing to meet the requirements of any other applicable legislation.

Credit failure

Although the credit rating of a compnay is assessed by outsides agencies,the insurer will nevertheless wish to arrange its business practices and overall risk profile such that it minimizes the possibility of being downgraded or indeed leas to the credit rating being upgraded

A downgrading of a company’s credit rating is a risk because downgrading would lead to:

• adverse publicity

• Greater difficulty and cost in raising additional capital in the market

And as a consequence

• the range of profitable activities may be constrained

• The PHs may be less likely to maintain or purchase polices with the insurer.

Internal unit-linked funds

An internal unit-linked fund consisted of clearly identifiable set of assets for example equities, properties, fixed-interest securities and deposits. The fund is divided into a number of equal units consisting of identical sub-sets of the fund’s assets and liabilities

Appropriation price

Situation where the company is creating units

Basic equity principle dictates that existing unit-holders should be in the same position after the transaction as before. This can only be achieved it the amount of money put into the fund for each new unit appropriated i.e. created is such that the net asset value per unit is ithe same after as before he appropriation

This amount of money -per unit is known as the appropriation price

Expropriation price

Cancelling units

In this situation continuing unit-holders should be unaffected by the unit cancelaltion. This can only be achieved if the amount of money the company takes out of the fund for each unit expropriated is such that the NAV per unit is the same after as before the expropriation.

The amount of money per unit is known as the expropriation price

It can be defined as the price at which the company will cancel units. In other words, it s the amount of money that it should take out of the fund in respect of each unit it cancels in order to preserve the interest of I continuing unit-holders

Calculation process for appropriation price

Appropriation price calculation

• the market offer price value of the assets held by the fund plus the expenses that would be incurred in the purchase and any stamp or other duty payable in respect if such a purchase

• Plus the value of any current assets such as cash on deposit or investments sold but not yet settled

• Less the value of any current assets liabilities such as investments purchases but not yet settled or loans to the fund

• Plus any accrued income such as interest income from fixed-interest securities and deposits, net of any outgo such as fund charges

• Less any allowance for accrued tax, if applicable

This gives the NAV of the fund on an offer basis. Dividing by the new number of units existing at the valuation date before any new units are created gives the appropriate price

Expropriation price

Similar to the appropriation price, main difference being that the starting point is the proceeds that would be received from selling the assets in the fund

This requires that the investments of the fund are valued on a marked bid basis and that the expense would be incurred in the sale are deducted other adjustments are as for the appropriation price.

The result is the NAV of the fund but this time on a bid basis. Dividing by the number of units existing a t the valuation date gives the expropriation price.

Offer basis

The amount of money put into the fund being equal to the net number of units being created multiplied by the appropriation price