• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Term Assurance Expense Risk

M

Matthew H

Keen member
Hi there,

Please could you explain the logic of the following:
"Expense risk is a large risk for term assurances as expenses form a relatively large proportion of the premiums".

Why is the fact that they're a large proportion a source of risk?

Thanks,
Matt
 
Matthew H said:
Hi there,

Please could you explain the logic of the following:
"Expense risk is a large risk for term assurances as expenses form a relatively large proportion of the premiums".

Why is the fact that they're a large proportion a source of risk?

Thanks,
Matt
Click to expand...
Hi Matt

This sentence doesn't say that the fact that expenses are a large proportion of premiums makes them a source of risk. But it is saying that it makes this risk more important than it would be for other contracts. For example, expenses could be estimated to be 20 and there is a risk that in fact they turn out to be 25. This is a big risk for a term assurance with premium of 50, but not such a big risk for an endowment assurance with premium of 250.

Best wishes

Mark
 
Thanks for your reply Mark. Apologies if I’m overthinking this.

So, just to be clear, are we saying that:
  • Given expenses are a large proportion of the premium, then they’re a price driver on TAs, and so slightly overestimating them will increase the price but a large % making premiums uncompetitive.
  • Or, are we saying that b/c TAs are low margin products, then if expenses are underestimated there’s not much profit margin to eat through before we’re making a loss? But surely the same argument could be made of mortality (ie small profit margin and so any inaccuracy could wipe out the profit margin).
 
Matthew H said:
Thanks for your reply Mark. Apologies if I’m overthinking this.

So, just to be clear, are we saying that:
  • Given expenses are a large proportion of the premium, then they’re a price driver on TAs, and so slightly overestimating them will increase the price but a large % making premiums uncompetitive.
  • Or, are we saying that b/c TAs are low margin products, then if expenses are underestimated there’s not much profit margin to eat through before we’re making a loss? But surely the same argument could be made of mortality (ie small profit margin and so any inaccuracy could wipe out the profit margin).
Click to expand...
Hi Matthew

I think you're reading more into this sentence than was intended. We really are just saying that expense risk is a large risk for term assurances because they make up a large proportion of premiums.

But looking at your statements above then I would say that these are all true as well.

So yes, as expenses are a big proportion of premiums they are a key driver of premium (as well as being a key source of risk). So yes, the premium will be very sensitive to change in the expense assumption.

And yes, term assurances operate in a very competitive market so can have low margins. So yes, if we underestimate expenses there won't be much profit margin to eat through before the contract becomes loss making. And yes, the same argument can be made for mortality as this drives claims.

Best wishes

Mark
 
You must log in or register to reply here.
Back
Top