Questions on parts 1 and 2

[niluki]

Hi, I have a couple of questions on parts 1 and 2 of the notes. Any help would be much appreciated. Thanks.

Chapter 1

Page 13 3rd paragraph: The core reading states that the extent of the risk of anti-selection depends on the extent of the actual or perceived choice the policyholder had in effecting the contract. Why does it depend on the perceived choice?

Page 28 solution 1.12 end: It states that [claim cost] – [asset share] ignores the cost of capital. How can this be when the asset share normally includes the cost of capital (see Chapter 5 page 5)

Chapter 3

Page 3 second paragraph: The core reading states that immediate annuities can be bought on single, joint life first death or last survivor bases. Does joint life first death mean that payment will cease on the first death? Also the core reading states that immediate annuities are payable for temporary periods only. Does payment then occur for the specified duration regardless of whether the life assured is alive or not?

Page 4 first paragraph: An explanation is given of unit linked annuities and how a certain number of units is paid per month at the then prevailing unit price. What happens if the unit fund runs out before the life assured dies? Will payments cease? Who bears the risk of fund implosion in this case?

Chapter 4

Page 18 fourth paragraph: The core reading states that unit-linked contracts often allow premiums to be missed for ad-hoc periods of time. How is this practical if there is a death benefit offered? If the policy holder knows he will die soon he can just stop paying the premiums and receive the death benefit. Also how are regular charges deducted from premiums? Won’t there be a risk of a negative unit fund developing if charges are deducted but no premiums come in?

Page 20: With index-linked contracts is there a danger of selective withdrawals when the index performs poorly relative to other available investments?

Chapter 5

Page 6 last paragraph: What does “reserves for profits allocated to the policy” mean?

Page 11 first sentence: Shouldn’t the asset share represent the upper limit on a policy at any given time rather than “over a period of time”?

Chapter 6

Does the distribution of profits to policyholders e.g. using a large terminal bonus also defer distribution of profits to shareholders? How do shareholder distributions compare with policyholder distributions over the policy term?

Chapter 9

Page 19: Is there a withdrawal risk as a result of tax changes? That is, if it is announced that tax on benefits will be higher would there be a motivation for an endowment policyholder to withdraw now before the tax comes into effect presuming that future tax loss greater than surrender penalty?

 

[Muppet]

1.13: would have thought the perceived choice becomes an actual choice??? so not sure "and perceived" adds anything. Don't think its anything to worry about though.

1.28: I think you're right but the cost of capital is often ignored when calculating the asset share - and if it is then the statement would be correct.

3.3 yes first death would stop on such
temporary annuity - it can work either way. Usually a temporary annuity would cease on death but you can also get a certain annuity that isn't contingent on survival. They mention an annuity to pay school fees. If this stopped on death then you'd be wise to have some life cover to take over the payments after death!!

3.4 think the risk usually lies with the company - it's still a life annuity. See http://www.makesenseofit.com/Retire...on-Products/Unit~linked-annuity.aspx#section2

4.18 think most contracts like that won't have a high guaranteed death benefit - eg a return of fund. Common on savings policies for retirement provision - eg stakeholder pensions. Your risk could be mitigated slightly by an explicit mortality charge but you'd still benefit if you stopped paying premiums. I suppose you could have a clause saying that life cover ceases/reduced if you take a premium holiday??????

4.20: is that really any different to a w/d risk on UL contracts - in that the performance of your fund could be lower than others, leading to w/d's. Company won't really lose out immediately on w/d as it will be paying out a low benefit, but will lose out on future profits from w/d-ing policies.

5.6 think it's referring to the allocation of profits from without profit business (bottom of page 2) but not 100% sure

5.11 probably

6 yes they're the same aren't they (just split 90:10 say).

9: yes if the tax applied to in-force policies

 

[niluki]

Thanks so much for your help.

There is just one thing I'm not sure about. When it comes to dividing up profits between shareholders and policyholders. You mention that it would be say a 90:10 split. But isn't this with regards to how much profit each is to get rather than when they get it? For example what would stop the insurer from distributing the 10% due to shareholders immediately and the 90% due to policyholders later as a terminal bonus?

 

[Robert Chadburn]

Hi. I believe that normally the shareholders and policholders receive their shares at the same times. Eg, under additions to benefits, when a reversionary bonus is declared, the shareholders will receive one-ninth (by value) of the total reversionary bonuses declared. And whenever a terminal bonus is paid by the insurer, then the shareholders become entitled to one-ninth of its amount. So what you suggest shouldn't happen.