Hi, Would like to ask why are we not using the death strain at risk formula to find the death claims and surrender claims for conventional contracts? But for a unit-linked profit testing on the non-unit fund, we would subtract the unit reserves from any death claims/surrender claims. In this question, death claim expenses are directly obtained by multiplying the probability of death in the year with the sum assured. Thanks a lot in advance.
Hi, Under unit-linked contracts we project a unit fund and the non-unit fund. The unit fund is run for the purposes of the policyholders and is used to pay any death or surrender benefits. We run our profit test on the non-unit fund, which is insurance company money. Therefore, when considering any outgo the insurer will have to make if a death occurs it's only the net amount (death payment - unit fund) For example, if the unit fund was 3,000 and the payment on death was 5,000, the insurer would only have to pay the 2,000 to top the benefit up and not the full 5,000. Under conventional contracts the insurer has to pay the full amount because there's no explicit fund there to cover the majority of the benefit. The insurer may hold a reserve for the benefit but that's for it's own benefit rather than for the benefit of the policyholder. And we include those reserves within our profit test and so they are allowed for. Does that help? Joe
