Exam Question Direction

Hi Acted Tutors,

The SP2 Sept 2023 exam question 2 is:-
2 (i) Outline the main customer needs that endowment assurance products may fulfil. [3]

A life insurance company is considering introducing a new unit-linked endowment assurance product to replace its existing with-profits endowment product.
(ii) Discuss the likely impact on the life insurance company of making this change. [5]
[Total 8]

For part ii, it asks for "impact" on the company. This made me think the question is not asking for "impacts" just an "impact". So i thought i should talk about one area only, Risk. However, the model solution talks about more than just risk (solution below).
So how should I have read/interpreted part 2ii ?

2ii) Solution:
It may change volumes of new business written by the insurer [½]
as well as the type of policyholders purchasing the business [½]
and the per policy profit margin. [½]
It may reduce the level of capital that the insurer needs to hold for the business [½]
Due to lower guarantee costs / passing more investment risk to the policyholder [½]
and the removal of the need to hold capital for smoothing [½]
providing that the insurer designs the product appropriately. [½]
Any change in risk profile will be slow though, as the existing business will remain. [½]
It will also be possible to limit exposure to early lapses through the product charging structure. [½]
The insurer is still exposed to early deaths and will need to hold capital to support these. [½]
It is possible that competitors have switched to a unit linked basis [½]
So, the insurer may be more in line with the market [½]
but they could have lost a key point of differentiation. [½]
However, if this is the insurer’s first unit linked product, then there will be expenses in making this change. [½]
and significant training of staff [½]
and systems development. [½]
and new marketing / product literature. [½]
Administration costs could also be higher depending on the number of funds. [½]
The company will need to change investment strategy [½]
or may outsource investment management. [½]
If the product is set up with variable charges, then it may be possible for the insurer to increase charges to cover increasing expenses…. [½]
but customer expectations here will be important…. [½]
and depend on information provided at the point of sale. [½]
Customer expectations are likely to be more straightforward for unit linked compared to with profits business. [½]
When the change is made, there may be issues or concerns raised by consumers/ brokers about the loss of the With-profits endowment product. [½]
[Marks available 12½, maximum 5]

Thank you for you replies.