September 2020 Q3 (ii)

[Act]

Hi,

Charges
This solution states that there is less discretion for management to increase charges on UWP rather than CWP business. Is this because UWP charges are explicit and so may lead to lapses/complaints if charges are increased? Whereas CWP charges are generally implicit, so policyholders don't notice a direct impact until TBs paid (as asset share reduced, leads to a reduction in TB)?

Investment strategy
The solution says there are different investment strategies for asset shares, cost of guarantees and the estate.

Policyholders expect asset shares to be invested with a certain level of risk and return, so a matched strategy wouldn't be appropriate here. I assume the strategy would incorporate some equity/property investment to maximise the asset shares and hence benefits

Cost of guarantees: is this the cost of guarantees exceeding asset shares? So COG = guarantees - asset shares? Or is the cost of guarantees just the amount of guarantees declared to date?

I thought that guarantees (original SA and previously declared bonuses) are matched when they are declared. Is the part of asset share that equals the guaranteed benefits matched, and the rest of the asset share (asset share - guaranteed benefits) invested to maximise returns?

Sorry I'm not sure if I'm interpreting cost of guarantees correctly.

Then how would the estate be invested? Presumably this would be similar to free assets under WOP fund, and the insurer has more discretion about how to invest?

Thanks for the help

 

[Rajat Mittal]

Regarding charges,
If they are explicit PH can easily observe if company has increased charges as compared to implicit.
Another point I would like to add is that in UWP fund, the value is benefit is in present term where as in case of CWP it is not in present term( based on sum assured). So PH can see at what rate benefit is growing up, are charges are dragging return down too much.

COG - if a policy has any guarantee then its asset share will be charged for the exposure of risk of guarantee biting in future. So company will be deducting some money from asset share and will keep it as seprate reserve to meet the guarantee. COG basically is the reseve that is kept aside to meet any additional cost of guarantee biting in future( Payout - AS at time of maturity).

 

[Em Francis]

Regarding charges,
If they are explicit PH can easily observe if company has increased charges as compared to implicit.
Another point I would like to add is that in UWP fund, the value is benefit is in present term where as in case of CWP it is not in present term( based on sum assured). So PH can see at what rate benefit is growing up, are charges are dragging return down too much.

COG - if a policy has any guarantee then its asset share will be charged for the exposure of risk of guarantee biting in future. So company will be deducting some money from asset share and will keep it as seprate reserve to meet the guarantee. COG basically is the reseve that is kept aside to meet any additional cost of guarantee biting in future( Payout - AS at time of maturity).

Thank you Rajat

Yes I agree

And to confirm 'cost of guarantee' is cost of guarantee over asset share.
And 'the estate' is normally defined as realistic assets over realistic liabilities, giving the company more discretion over its investment.