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Question of Life Insurance Products (4)

Y

Yash A

Member
Hi All,

We have a question on page 3 of Chapter 4 as below (part a):
Whether a unit-linked or a without-profits benefit structure has higher expected cost for the policyholder?

Answer in CMP - Without-profits contract because the insurance company has to include significant margins in price in order to cover the risk of making losses from future adverse experience.

My interpretation was Unit-linked contract should have higher expected cost for policyholder because of adverse investment experience and it is borne by policyholder.

Can anyone please help explain the above?

Thanks,
Yash
 
Yash A said:
Hi All,

We have a question on page 3 of Chapter 4 as below (part a):
Whether a unit-linked or a without-profits benefit structure has higher expected cost for the policyholder?

Answer in CMP - Without-profits contract because the insurance company has to include significant margins in price in order to cover the risk of making losses from future adverse experience.

My interpretation was Unit-linked contract should have higher expected cost for policyholder because of adverse investment experience and it is borne by policyholder.

Can anyone please help explain the above?

Thanks,
Yash
Click to expand...
Hi Yash

It looks like you have an old version of the notes. I would recommend that you buy a new copy, or make sure that you have used the CMP upgrade to update your version for the latest changes.

You're right that unit-linked policyholders carry the risk of poor investment performance. But they also have the potential for high investment returns. The question concerns itself with the expected cost, so the mean rather than the variance. So thinking about the potential high and low returns will cancel out for the mean.

However, the insurance company will be worried about the risk of poor investment performance when pricing without-profits contracts as they must meet the guaranteed payout whatever happens. So they will include risk margins when pricing the without-profits contract which will increase the cost for the policyholder.

Best wishes


Mark
 
Mark Willder said:
Hi Yash

It looks like you have an old version of the notes. I would recommend that you buy a new copy, or make sure that you have used the CMP upgrade to update your version for the latest changes.

You're right that unit-linked policyholders carry the risk of poor investment performance. But they also have the potential for high investment returns. The question concerns itself with the expected cost, so the mean rather than the variance. So thinking about the potential high and low returns will cancel out for the mean.

However, the insurance company will be worried about the risk of poor investment performance when pricing without-profits contracts as they must meet the guaranteed payout whatever happens. So they will include risk margins when pricing the without-profits contract which will increase the cost for the policyholder.

Best wishes


Mark
Click to expand...
Got it. Thanks Mark
 
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