CP1 - Chapter 22 Contract Design

[Darragh Kelly]

Hi

I just have a few questions in relation to chapter 22.

Section 2 - Page 8 (middle of page)
It mentions in the middle of page 8, that to reduce risks for critical illness products, the contract was offered in unit-linked form rather then long-term guaratee. Is this because the policyholder for unit linked contracts, gets the values of the units at the end of term. Rather then say a with-profit product that offers a guaranteed value which the insurer would have to meet any shortfall on?

Section 3 - Page 9 (Bottom paragraph Core Reading)
Just wondering how disclosure requirements set out the discontinuance basis, and how they can influence the extent to which policies termination later, or remain to maturity subsidise the benefits offered on short term duration discontinuance? Just finding it tough in general to understand the paragraph at the bottom of page 9.

Section 7.2 - Page 17+18
So why is the provider modifying the contract here to offer a joint life annuities and annuity options for other frequencies of pension payment, based on the guaranteed annuity rates and non-guarateed rates? Is the point here that it needs to be communicated to the customer clearly their options so they understand all options available to them?

Section 8.2 - Page 19
How exactly does selectiive withdrawals govern discontinuence terms? For example, policyholders that have a term assurance contract and know they are very healthy, decide to surrender and get some sort of lump sum. So they know they are healthy and will more then likely survive the term so decide instead to withdraw to get some kind of payout?

Section 10.2 - Page 25
Just on members that move from active to deferred status what does transferring benefits away mean? Is it just transfering the value into another arrangement eg savings account or another pension scheme? And does retaining discontinuance benefits mean waiting until retirement to recieve the benefits (lump sum) you've earned to the point at which you defer?

Thanks very much in advance for the help.

Kind regards,

Darragh

 

[Aman Sehra]

Section 2 - Page 8 (middle of page)
It mentions in the middle of page 8, that to reduce risks for critical illness products, the contract was offered in unit-linked form rather then long-term guaratee. Is this because the policyholder for unit linked contracts, gets the values of the units at the end of term. Rather then say a with-profit product that offers a guaranteed value which the insurer would have to meet any shortfall on?

Yes, correct.

Section 3 - Page 9 (Bottom paragraph Core Reading)
Just wondering how disclosure requirements set out the discontinuance basis, and how they can influence the extent to which policies termination later, or remain to maturity subsidise the benefits offered on short term duration discontinuance? Just finding it tough in general to understand the paragraph at the bottom of page 9.

This paragraph is merely stating that the disclosure requirements may set out the discontinuance basis that is to be used for the policies. Within that basis, more details will be included around some policies subsidise others.

Section 7.2 - Page 17+18
So why is the provider modifying the contract here to offer a joint life annuities and annuity options for other frequencies of pension payment, based on the guaranteed annuity rates and non-guarateed rates? Is the point here that it needs to be communicated to the customer clearly their options so they understand all options available to them?

Correct, the example in the core reading can be complex for a non-technical pensioner, so the need to give clear explanation is increasingly necessary. The bottom of page 17 is just an example of such.

Section 8.2 - Page 19
How exactly does selectiive withdrawals govern discontinuence terms? For example, policyholders that have a term assurance contract and know they are very healthy, decide to surrender and get some sort of lump sum. So they know they are healthy and will more then likely survive the term so decide instead to withdraw to get some kind of payout?

If you have a look at the example at the end of page 19, and solution at top of page 20, this details the discontinuance theory of an annuity, however in practice, it is rare for contracts such as this to offer a discontinuance benefit. The message here is that the likelihood of selective withdrawals will impact if there even is a discontinuance benefit, and if so, what it might be. It could be designed to ensure that the insurer isn't left with a pool of policyholders who are anticipated to have worse than expected experience.

Section 10.2 - Page 25
Just on members that move from active to deferred status what does transferring benefits away mean? Is it just transfering the value into another arrangement eg savings account or another pension scheme? And does retaining discontinuance benefits mean waiting until retirement to recieve the benefits (lump sum) you've earned to the point at which you defer?

Yes, correct. A good resource to learn more about DB pensions is by looking at something called the trustee toolkit, as provided by the pensions regulator (you can find it on any search engine online). This may just help build up some knowledge about pensions, particularly DB pensions; this may be useful when looking at the pensions type questions in CP1.

Thanks
Aman
ActEd Tutor

 

[Darragh Kelly]

Yes, correct.



This paragraph is merely stating that the disclosure requirements may set out the discontinuance basis that is to be used for the policies. Within that basis, more details will be included around some policies subsidise others.



Correct, the example in the core reading can be complex for a non-technical pensioner, so the need to give clear explanation is increasingly necessary. The bottom of page 17 is just an example of such.



If you have a look at the example at the end of page 19, and solution at top of page 20, this details the discontinuance theory of an annuity, however in practice, it is rare for contracts such as this to offer a discontinuance benefit. The message here is that the likelihood of selective withdrawals will impact if there even is a discontinuance benefit, and if so, what it might be. It could be designed to ensure that the insurer isn't left with a pool of policyholders who are anticipated to have worse than expected experience.



Yes, correct. A good resource to learn more about DB pensions is by looking at something called the trustee toolkit, as provided by the pensions regulator (you can find it on any search engine online). This may just help build up some knowledge about pensions, particularly DB pensions; this may be useful when looking at the pensions type questions in CP1.

Thanks
Aman
ActEd Tutor

Hi,

Thanks for the detailed reponse on above. All is clear except for the following:

Section 3 - Page 9 (Bottom paragraph Core Reading)
Just wondering how disclosure requirements set out the discontinuance basis, and how they can influence the extent to which policies termination later, or remain to maturity subsidise the benefits offered on short term duration discontinuance? Just finding it tough in general to understand the paragraph at the bottom of page 9.

This paragraph is merely stating that the disclosure requirements may set out the discontinuance basis that is to be used for the policies. Within that basis, more details will be included around some policies subsidise others.

Just exactly how do the policies terminating later or at maturity date subsidise the benefits offereed on short duration discontinuance? My guess is that there will be more income recouped in these 'mature' policies (management charges, admin charges, income) and so will cover/subsidise the cost of short duration discontinuance as generally insurance company will not have recieved sufficient prems to cover the benefits?

Section 8.2 - Page 19
How exactly does selectiive withdrawals govern discontinuence terms? For example, policyholders that have a term assurance contract and know they are very healthy, decide to surrender and get some sort of lump sum. So they know they are healthy and will more then likely survive the term so decide instead to withdraw to get some kind of payout?

If you have a look at the example at the end of page 19, and solution at top of page 20, this details the discontinuance theory of an annuity, however in practice, it is rare for contracts such as this to offer a discontinuance benefit. The message here is that the likelihood of selective withdrawals will impact if there even is a discontinuance benefit, and if so, what it might be. It could be designed to ensure that the insurer isn't left with a pool of policyholders who are anticipated to have worse than expected experience.

So basically, likelihood of policyholders selecting against the insurance company governs if the insurance company will offer discontinuance benefits on that product/contract? Below I've broken down my understanding of it using the example you advised me to (the immediate annuity as an example).

1. The insurance company knows the sicker policyholders will withdrawal and expect a surrender/discontinuance benefit ie a high chance of selective withdrawal on annuity product/contract.
2. So they need to think about how much the the discontinuance benefit is.
3. For annuities if we make incorrect assumptions, the discontinuance could be costly ie estimating how long the policyholder would have live for if they didn't withdrawal.
4. Because of this risk they then may decide not to offer the discontinuence benefits for annuity contracts.
5. So going back to the original point - the likelihood of selective withdrawal determines if the insurance contract will offer a discontinuance benefit in the first place.

Have I got that ok?

Thanks,

Darragh

 

[Aman Sehra]

Hi Darragh,

Section 3 - Page 9 (Bottom paragraph Core Reading)
Just wondering how disclosure requirements set out the discontinuance basis, and how they can influence the extent to which policies termination later, or remain to maturity subsidise the benefits offered on short term duration discontinuance? Just finding it tough in general to understand the paragraph at the bottom of page 9.

This paragraph is merely stating that the disclosure requirements may set out the discontinuance basis that is to be used for the policies. Within that basis, more details will be included around some policies subsidise others.

Just exactly how do the policies terminating later or at maturity date subsidise the benefits offereed on short duration discontinuance? My guess is that there will be more income recouped in these 'mature' policies (management charges, admin charges, income) and so will cover/subsidise the cost of short duration discontinuance as generally insurance company will not have recieved sufficient prems to cover the benefits?

The core reading does not go into detail precisely how the policies terminating later will subsidise the benefits offered on short duration discontinuance. Whilst your guess seems reasonable, this isn't knowledge required for CP1. I suspect this will be covered in the SP exams (if you work in the pensions world anyway). For now, I recommend continuing on this basis, however if you see a question on this topic where the solutions aren't quite clear, do post on a new thread.

So basically, likelihood of policyholders selecting against the insurance company governs if the insurance company will offer discontinuance benefits on that product/contract? Below I've broken down my understanding of it using the example you advised me to (the immediate annuity as an example).

1. The insurance company knows the sicker policyholders will withdrawal and expect a surrender/discontinuance benefit ie a high chance of selective withdrawal on annuity product/contract.
2. So they need to think about how much the the discontinuance benefit is.
3. For annuities if we make incorrect assumptions, the discontinuance could be costly ie estimating how long the policyholder would have live for if they didn't withdrawal.
4. Because of this risk they then may decide not to offer the discontinuence benefits for annuity contracts.
5. So going back to the original point - the likelihood of selective withdrawal determines if the insurance contract will offer a discontinuance benefit in the first place.

Have I got that ok?

Yes, this is broadly correct, in that the likelihood of selective withdrawal would help determine if the insurance contract will offer a discontinuance benefit in the first place. However, whether or not there is a discontinuance benefit could also be determined by market practice, regulatory requirements, or even the difficulty when assessing the terms of discontinuance (perhaps due to lack of data?). It is important to recognise that discontinuance terms may be governed by a number of factors, not just likelihood of selective withdrawals.

I hope that helps

Thanks
Aman
ActEd Tutor