ASET answers - Sept 2011 - Q3 ii

[Viki2010]

page 16 - Risks to the policyholder - Insurer insolvency

The answer on Insurer insolvency says "since guarantees are lower for with- profits business than for without profits business, the risk is less significant than for that type of business".

I really don't see how the guarantees for with-profits are lower than for without profits. For with profits we are guaranteeing a SA + all reversionary bonuses along the way. For without profits we are guaranteeing only a SA.


Can someone explain the ASET solution to this question?

 

[mugono]

page 16 - Risks to the policyholder - Insurer insolvency

The answer on Insurer insolvency says "since guarantees are lower for with- profits business than for without profits business, the risk is less significant than for that type of business".

I really don't see how the guarantees for with-profits are lower than for without profits. For with profits we are guaranteeing a SA + all reversionary bonuses along the way. For without profits we are guaranteeing only a SA.


Can someone explain the ASET solution to this question?

Hi

The guarantees under with-profits increase over time at the discretion of the insurer (after considering PRE etc etc). If for e.g. there is a sudden fall in investment returns the insurer can share the pain with the policyholder via a reduction in RB/TB added to their benefits.

Without profits however guarantees the 'full' benefit at outset, which therefore exposes the insurer to all of the investment (and other) risks.

Hope that helps.

 

[Viki2010]

Hi

The guarantees under with-profits increase over time at the discretion of the insurer (after considering PRE etc etc). If for e.g. there is a sudden fall in investment returns the insurer can share the pain with the policyholder via a reduction in RB/TB added to their benefits.

Without profits however guarantees the 'full' benefit at outset, which therefore exposes the insurer to all of the investment (and other) risks.

Hope that helps.

Thanks. What I had in mind was an example of e.g. traditional Endowment without profits vs. an Endowment with profits. For the first one we guarantee SA upon maturity or death. For the second one we are guaranteeing a SA upon maturity or death and also in addition all RB along the way.

In this example, I would say that the with profits version of the Endowment has higher guarantees.

 

[d.j.collins]

I will attempt an example:

Say a policyholder wants to buy an endowment with a monthly premium of £20.
For a With-out profits policy, the guaranteed SA is (say) £5,000

If this premium was used to but a With-Profits policy, the initial sum assured would be lower (say) £3,000. This is because the insurer might expect on a best estimate basis to pay out a further £3,000 in bonuses.
So the policyholder receives a lower initial guaranteed SA than they would have on a without-profits policy, but with the expectation of a higher final payout.

But if investment returns turn out to be rubbish, then the insurer may decide to declare lower bonuses than anticipated. This is why the risk to the insurer is lower on a With-Profits policy.

The guaranteed amount at any point on the With-Profits policy is just the SA+ RB to date, which will be much lower than for the Without-Profits SA.

I hope that makes some sense!

 

[Viki2010]

Thanks. This example is crystal clear. I had a different understanding before.

I will attempt an example:

Say a policyholder wants to buy an endowment with a monthly premium of £20.
For a With-out profits policy, the guaranteed SA is (say) £5,000

If this premium was used to but a With-Profits policy, the initial sum assured would be lower (say) £3,000. This is because the insurer might expect on a best estimate basis to pay out a further £3,000 in bonuses.
So the policyholder receives a lower initial guaranteed SA than they would have on a without-profits policy, but with the expectation of a higher final payout.

But if investment returns turn out to be rubbish, then the insurer may decide to declare lower bonuses than anticipated. This is why the risk to the insurer is lower on a With-Profits policy.

The guaranteed amount at any point on the With-Profits policy is just the SA+ RB to date, which will be much lower than for the Without-Profits SA.

I hope that makes some sense!