Chapter 17

Question 1

Explain what is meant by an internal unit-linked fund (4)

Answer 1

• Consists of a clearly identifiable set of assets, e.g. equities.
• It is divided into a number of equal units consisting of identical sub-sets of the fund’s assets and liabilities.
• This division is notional.
• The insurer is responsible for determining the price of units.

Question 2

Explain what is meant by the basic equity principle

Answer 2

• the interests of unit holders not involved in a unit transaction should be unaffected by that transaction.
• For the holder of a unit the only prices relevant are those at which they buy units in the fund and those at which they redeem units.
• In theory, the movement in price between those two events should only reflect the performance of the assets backing the units and charges deductible under the policy terms.
• Therefore the price of units should not be affected by creation or cancellation of other units.
• Otherwise cross-subsidies between unit holders would arise, which would be viewed as unfair.

Question 3

Conditions that need to be satisfied for actuarial funding to be used (5)

Answer 3

• future charges on the product are sufficient to cover future expenses (i.e. non-unit cashflows should remain positive) when projected on a prudent basis.
• There should also be an appropriate UNIT RELATED! surrender penalty.
• The extent of the funding is limited by the size of the surrender penalty, so that the surrender value is never larger than the funded value of units (to prevent a strain on surrender).
• The unfunded value of units should only be available on contingent events such as death or at maturity.
• There may be regulatory constraints on using actuarial funding.