Chapter 4, page 3

Page 3, Qus (a) - If the expected cost for policyholder is higher for without profit contracts than a unit-linked contract, does it mean that the premium for without profit contracts will be high?
Shouldn't it be for unit-linked as there is a possibility for higher returns?

 

An insurer will charge a risk premium for the risk(s) they are exposed. A without profit contract (which could also be wrapped as a unit-linked contract) that guarantees that the customer will receive a known payment is more risky to an insurer than one that does not; and will consequently cost the customer more.

A unit-linked contract that did not provide any guarantee would be less risky to the insurer than a contract that did not. This reduced risk would lower the premium / charge compared to a contract that included (e.g. a maturity or death) a guarantee. The investment performance is a risk / reward for the customer: and therefore should have no bearing on the insurer's pricing.

In general, the expected benefit cost is only one component of a premium. For e.g. the premium / charge may also take account of expenses, commissions, investment return assumptions etc.