Mortality Option and Guarantee

[N_Exam]

Hi,

Please could someone answer my query. Thank You

Mortality Option for TA:-
The course says that "As take up of the mortality option increases so the Cost of the option increases". Why is this?

I would think that as take up rate increases the cost decreases because
volume of policies increases and per-policy expenses decrease. So option cost decreases.
Also as take up increases, so the average mortality of lives tends to the average policyholder buying the product which is likley less than the one sbuying the option, so option cost decrease as less likelihood of claim.

Guarantee question I've already answered for myself.

 

[Mark Willder]

Hi,

Please could someone answer my query. Thank You

Mortality Option for TA:-
The course says that "As take up of the mortality option increases so the Cost of the option increases". Why is this?

I would think that as take up rate increases the cost decreases because
volume of policies increases and per-policy expenses decrease. So option cost decreases.
Also as take up increases, so the average mortality of lives tends to the average policyholder buying the product which is likley less than the one sbuying the option, so option cost decrease as less likelihood of claim.

Guarantee question I've already answered for myself.

Hi

You are right about the expenses, but this is very much a second order impact.

You are also right that the average cost per policy will be lower as the average mortality of those taking up the option will be closer to ultimate mortality rates if more people exercise the option.

However, we are thinking here about the total cost. The policyholders are being offered standard premiums rates but do not need to go through underwriting when they exercise the option. So there will be anti-selection. So many of the policyholders that exercise the option will be in poor health, and the more of these policyholders that exercise the option the bigger the insurer's cost will be.

Best wishes

Mark

 

[N_Exam]

Thank you, I see.

So does this mean:-

If withdrawals prior to exercise date are low, then higher the cost of the option?
because there are more policyholders who can potentially exercise the option?

The more encouragement given to policyholders to exercise the option, the higher the cost?
because more policyholders will exercise the option?

Thank you.

 

[Mark Willder]

Thank you, I see.

So does this mean:-

If withdrawals prior to exercise date are low, then higher the cost of the option?
because there are more policyholders who can potentially exercise the option?

The more encouragement given to policyholders to exercise the option, the higher the cost?
because more policyholders will exercise the option?

Thank you.

Hi

Yes that's right. Both of these will increase the total cost of the option.

Best wishes

Mark

 

[N_Exam]

Thank you

 

[N_Exam]

Hi Mark,

Please can I ask a question about "Unitised With profits " (UWP) products Vs. "Unit Linked" (UL) products.
How are they similar and how are they different?

Notes say the charging structure could be similar. Ok i understand that. But could the UWP product have a non-unit fund also?

For the UWP, who invests the premiums? The company (like a usual WP product, so investment risk is on the company) or the policyholder (Like a UL product, so investment risk is on the policyholder)?

Does the UWP product act similarly to a WP product in that its units are smoothed and company profits are taken on bonus declarations?


Thank you.

 

[Mark Willder]

Hi Mark,

Please can I ask a question about "Unitised With profits " (UWP) products Vs. "Unit Linked" (UL) products.
How are they similar and how are they different?

Notes say the charging structure could be similar. Ok i understand that. But could the UWP product have a non-unit fund also?

For the UWP, who invests the premiums? The company (like a usual WP product, so investment risk is on the company) or the policyholder (Like a UL product, so investment risk is on the policyholder)?

Does the UWP product act similarly to a WP product in that its units are smoothed and company profits are taken on bonus declarations?


Thank you.

Hi

Yes UWP and UL could have a very similar charging structure with the charges being paid into a non-unit fund.

With UL the policyholder can choose between different funds, but the actual assets within the funds would be chosen by the insurer. The policyholder directly carries investment risk as a falling asset value leads to a falling fund value.

With WP (either UWP or CWP) the insurer chooses the assets, ie the balance between shares, bonds etc. The investment risk is shared between policyholders and insurer, eg a low investment return will reduce the asset share and so the likely payout, but the insurer guarantees some of the payout.

Yes UWP has smoothing just like CWP. The insurer often takes some part of the cost of bonus as a shareholder transfer (so we see that investment risk is shared here too).

Best wishes

Mark