2025-10-07

Question 1

List 5 key risks on accumulating with-profits

Answer 1

• Investment
• Expenses
• Tax
• Adverse publicity
• Depletion of capital or free reserves

Question 2

How does the nature of risk to shareholders change if accumulating with-profits only shares investment profits with policyholders?

Answer 2

Shareholder risk would be greater because they would not be able to reduce bonuses if charges proved inadequate.

Question 3

What would be the effect on investment risk of allowing a MVR at death or maturity?

Answer 3

Investment risk would be largely reduced or removed because the MVR would pass a discretionary share of the value of assets to the shareholders.

Question 4

Why are MVRs not allowed at maturity or death?

Answer 4

It would undermine any investment guarantees on the product.

Question 5

What are the two sources of investment risk to shareholders of an accumulating with-profits?

Answer 5

• Investment guarantees.
• Explicit fund management charges.

Question 6

How may surrender values be specified on accumulating with-profits?

Answer 6

The face value of the benefit, plus a terminal bonus, and less a Market Value Reduction.

Question 7

Why is there still surrender risk on accumulating with-profits when there can be an MVR?

Answer 7

• The asset share may be negative.
• Policyholder Reasonable Expectations may limit the insurer’s ability to apply an adequate MVR.
• Policyholders may not have fully understood the contract.

Question 8

What are the main risks to policyholders on accumulating with-profits?

Answer 8

• Opportunity cost from investing premiums in a bank account.
• Risk the insurer becomes insolvent.
• Inability to continue paying premiums may lead to surrender at poor value.
• Risk the policyholder did not understand the policy.

Question 9

Which source of profit is usually distributed under the Revalorisation Method?

Answer 9

Savings profit - profit from assets is distributed in whole or in part to with-profits policyholders.

Question 10

How is Savings Profit calculated?

Answer 10

Actual Investment Return / Expected Investment Return * Assets Held.

Question 11

What considerations will an insurer need when defining the Savings element of a with-profits product?

Answer 11

• Whether Savings includes both investment income and unrealised capital gains.
• What proportion of Savings profit to distribute to policyholders.

Question 12

What restrictions may exist in distributing Savings profit to with-profits policyholders?

Answer 12

Legislation may dictate a minimum percentage of Savings profit is distributed to with-profits policyholders.

Question 13

What basis is insurance profit calculated on?

Answer 13

Insurance profit is the surplus of actual experience being better than the valuation basis.

Question 14

Why is insurance profit unlikely to be large on with-profits?

Answer 14

The valuation basis is likely to be on a best estimate basis, minimizing the Insurance Profit.

Question 15

How are profits usually distributed to policyholders under the Contribution Method?

Answer 15

Annual dividends, though a terminal dividend may be paid.

Question 16

How may the annual dividend be adjusted under the Contribution method?

Answer 16

• Policy fee
• Mortality experience
• Expense experience
• Lapse experience

Question 17

What are the three ways dividends can be taken by a policyholder under the Contribution method?

Answer 17

• Take as Cash
• Held on deposit
• Used to reduce future premiums

Question 18

Why will links to external funds increase charges to policyholders and or reduce profitability?

Answer 18

The external managers will charge for fund management.

Question 19

List 5 common charges on a unit-linked product

Answer 19

• Allocation rate
• Fund management charge
• Bid-offer spread
• Policy fee
• Risk benefit charges

Question 20

What is an index-linked specific investment risk?

Answer 20

The insurer may not be able to match the guaranteed benefit precisely due to timing of investments.

Question 21

List 3 key risks related to investments

Answer 21

• Credit risk
• Counterparty risk
• Liquidity risk