Hi there,
I have several questions concerning the 2 products mentioned in the above question. I think overall I'm not quite sure about their product features, so when I review the standard answers I've got many questions and would like some elaboration here.
Especially, in the standard answer to question (v) about considerations when developing the products,
1. "suitability for customer needs" for Product B it says "The product offers guaranteed income which may be desirable in these times of low interest rates. The product leaves the decision up to the customer as to what term(s) to choose. The customer may be unhappy if their funds run out and they have nothing left."
Product B in the question is a simple endowment product, with various terms for policyholders to choose. So what does it mean by "funds run out"? The product doesn’t have a fund. It just offers a fixed amount of mature benefit. How can it be running out?
2. "capital requirements" for Product A it says "Also the maturity terms chosen for Product B may not match those needed for Product A".
don't get what the meaning here...For Product A, which is an equity release loan basically. Doesn’t it only need capital support at the point of sale? Thus as long as there are premiums collected on B, A should be able to sustain. Why does the term of B matter?
3. "capital requirements" for both products, it says "Neither product appears to easily meet the requirements to achieve the matching adjustment. If the company wants to obtain the matching adjustment it may need specialist advice."
I wonder Product B - endowment has possibility: its CF is relatively predictable, backed by fixed income assets of various terms, no?
4. "sensitivity" for Product B, it says "There is an indication that the availability of Product B could be limited".
What is the indication here? I can't see where this infer come from...
5. "company reputation" for Product B it says "The company must ensure that the customer understands the difference between this and an annuity which provides an income for life."
This is my major question about Product B - why the company offers Product B to replace annuity. From my understanding these two are effectively the same. Product B just breaks down annuity payments into several individual mature benefits. It offers more flexibility as in when the "annuity payments" should come up and how much it should be. Correct me if I'm wrong - by holding this endowment, money is not locked in the same rate for that long as a life-time annuity does? Customers get more flexibility of investing during the period when the guaranteed rate offered by the insurer prevails the market interest rate and can also have the option to quickly switch to interest rate offered in the market when market rate prevails. All due to the relatively shorter term of the endowment. Is this the main difference here?
6. "Taxation" for Product A, it says "taxation of the equity mortgage asset may be complex".
I wonder why it is a risk for the insurance company. At maturity, is it the policyholder who sells the house, pays tax and repays insurer the loan amount or is it the insurer who simply takes over the ownership of the house from the policyholder and then be it sell or keep holding the house that is totally at the insurer’s discretion, and be responsible for tax payment on the house?
7. "cross-subsidies" it mentions new business mix risk.
Just a general point, not specifically about this question - I wonder if it's because that the demographic distribution could be different from expected. Also maybe only large size exceeds a certain % in NB portfolio that the whole product would be break-even assume small size is a loss and large size makes profit. Is this the so-called “NB mix risk”?
8. "administration" for Product A, it mentions about outsourcing. I wonder if it refers to outsourcing admin function to a specialist house agent. Can you give some examples of the possible outsourcer on Product A please?
9. for product A, it says "Admissibility of assets which is particularly relevant for Product A". Does it mean underwriting on the underlying houses? i.e. evaluating the current value and volatility in future value of the house?
Thanks a lot!!
I have several questions concerning the 2 products mentioned in the above question. I think overall I'm not quite sure about their product features, so when I review the standard answers I've got many questions and would like some elaboration here.
Especially, in the standard answer to question (v) about considerations when developing the products,
1. "suitability for customer needs" for Product B it says "The product offers guaranteed income which may be desirable in these times of low interest rates. The product leaves the decision up to the customer as to what term(s) to choose. The customer may be unhappy if their funds run out and they have nothing left."
Product B in the question is a simple endowment product, with various terms for policyholders to choose. So what does it mean by "funds run out"? The product doesn’t have a fund. It just offers a fixed amount of mature benefit. How can it be running out?
2. "capital requirements" for Product A it says "Also the maturity terms chosen for Product B may not match those needed for Product A".
don't get what the meaning here...For Product A, which is an equity release loan basically. Doesn’t it only need capital support at the point of sale? Thus as long as there are premiums collected on B, A should be able to sustain. Why does the term of B matter?
3. "capital requirements" for both products, it says "Neither product appears to easily meet the requirements to achieve the matching adjustment. If the company wants to obtain the matching adjustment it may need specialist advice."
I wonder Product B - endowment has possibility: its CF is relatively predictable, backed by fixed income assets of various terms, no?
4. "sensitivity" for Product B, it says "There is an indication that the availability of Product B could be limited".
What is the indication here? I can't see where this infer come from...
5. "company reputation" for Product B it says "The company must ensure that the customer understands the difference between this and an annuity which provides an income for life."
This is my major question about Product B - why the company offers Product B to replace annuity. From my understanding these two are effectively the same. Product B just breaks down annuity payments into several individual mature benefits. It offers more flexibility as in when the "annuity payments" should come up and how much it should be. Correct me if I'm wrong - by holding this endowment, money is not locked in the same rate for that long as a life-time annuity does? Customers get more flexibility of investing during the period when the guaranteed rate offered by the insurer prevails the market interest rate and can also have the option to quickly switch to interest rate offered in the market when market rate prevails. All due to the relatively shorter term of the endowment. Is this the main difference here?
6. "Taxation" for Product A, it says "taxation of the equity mortgage asset may be complex".
I wonder why it is a risk for the insurance company. At maturity, is it the policyholder who sells the house, pays tax and repays insurer the loan amount or is it the insurer who simply takes over the ownership of the house from the policyholder and then be it sell or keep holding the house that is totally at the insurer’s discretion, and be responsible for tax payment on the house?
7. "cross-subsidies" it mentions new business mix risk.
Just a general point, not specifically about this question - I wonder if it's because that the demographic distribution could be different from expected. Also maybe only large size exceeds a certain % in NB portfolio that the whole product would be break-even assume small size is a loss and large size makes profit. Is this the so-called “NB mix risk”?
8. "administration" for Product A, it mentions about outsourcing. I wonder if it refers to outsourcing admin function to a specialist house agent. Can you give some examples of the possible outsourcer on Product A please?
9. for product A, it says "Admissibility of assets which is particularly relevant for Product A". Does it mean underwriting on the underlying houses? i.e. evaluating the current value and volatility in future value of the house?
Thanks a lot!!