Short Questions to Help Understanding

Hi

Thanks for these question. I've answered them in turn below.

Q1. Withdrawals should be interpreted as widely as possible, so lapses, surrenders and paid up. High withdrawals means low persistency.

Q1.1 We would only calculate asset shares for in force policies, so no need to think about maturity claims. We would deduct the cost of death claims from asset shares (death benefit in excess of asset share). some insurers would similarly add/deduct surrender profits/losses, but some would not.

Q2 Yes, non-linked means not unit-linked, so includes conventional without-profits and conventional with-profits.

Q3 The Core Reading uses without-profits throughout, so this is the term to use in the exam. But yes, many actuaries prefer to refer to these as non-profit.

Q4 I would say that companies need to keep a minimum level of solvency capital. The reserves will be calculated as the expected present value of the claims and expenses less premiums, so as such there isn't really a minimum level, just a formula to follow.

Q5 A realistic basis is the same as a best estimate. The surrenders/alterations chapter refer to this basis as having no margins.

Q6 No, this isn't right - you've double counted here. There are lots of different ways to assess profitability - usually if a policy makes a profit in one assessment (eg the profit test) it will also make a profit on another assessment (eg asset share minus payout). By pricing a contract to make a profit we ensure that prospectively at the outset Expected Present Value (premiums) > EPV(benefits and expenses). Hence considering this retrospectively at maturity Accumulated (premiums) > Accumulated (benefits plus expenses), ie the asset share is bigger than the payout.

Similarly you've double counted the expenses for WP. If we are paying asset share at maturity then the only thing that matters is the asset share calculation (which will have expenses deducted from it). If we didn't calculate the premium to be enough to cover the expenses then the premium would be too small and the asset share wouldn't grow to the required value.

Q7 Yes you can make unit-linked and unitised with-profits policies paid up. This normally doesn't require any special alteration calculation (unlike non-linked policies). The fund just continues to grow/fall with investment performance for UL and to grow with bonuses for UWP. In both cases charges would continue to be deducted.

I hope these help.

Best wishes

Mark

 

Hi

Q2. Whenever non-linked is used in the course notes it is used to mean the opposite to unit-linked. So non-linked means not unit-linked. So non-linked means conventional with and without profits contracts. So unless the context indicates otherwise, non-linked should include both level and index-linked annuities.

Q8. The actual expenses are deducted from asset shares. So if expenses are higher than expected then asset shares will be lower and so bonuses will be lower.

Best wishes

Mark