Unit-linked contracts

Question 1

Key features of the unit fund of the unit linked contracts

Answer 1

Unit fund
- Premiums paid into the investment fund purchase a number of units

Fund value
- depends on the value of the underlying assets underlying the investment fund
- fund value= unit price* # of units held by p/h.
- Value of policy at maturity is usually the bid value of the units.

Charges deducted
- timing ( before being invested or deduct from the units fund)
- How( monetary or unit cancellation)

Benefits
- Maturity
- Death benefit
- Surrender

Surrender value and surrender penalty

Question 2

How are unit-linked contracts charged?

Answer 2

Before being invested ( How)
- allocation rate < 100%
- bid offer spread = offer - bid price
- fixed amount deducted from each paid premium

Deduct from unit funds
- regular risk charges
- regular fixed charge
- regular % of fund value ( fund management charges)

Question 3

What needs are met by unit-linked contracts

Answer 3

• for consumers wishing to obtain higher expected level of benefit for a given premium
• or wishing to obtain a given expected level of benefit for a lower premium
• obtain guarantees at a lower costs as compared to conventional without profits contracts
• Consumers with a need for flexibility
  flexibility in the types and level of cover included
  flexibility in the ability to vary premiums according to need

Question 4

risks of U/L of products to insurer

Answer 4

• Investment risk
  reduced level of guarantees as compared to without profits then lower risk.
• Financial risk from investment expenses and demographic assumptions
• Financial risk arising from surrender
• Anti-selection risk and selective withdrawal risk higher thana comparable non-linked contract due to the open charging structure.
• Marketing risk (especially due to the higher variance of the level of benefit for a given premium)

– Expense risk

Question 5

Capital requirements for u/l

Answer 5

• depends critically on the contract design
  e.g. low allocation premium = capital efficient
  Actuarial funding( if permitted)= capital efficient
  recouping initial expenses and producing profit slowly= capital intense

Question 6

Index-linked contracts Risks to the insurer and policyholder

Answer 6

• Investment risk
  Not being able to precisely match the benefit guarantee it is giving
• Expense risk
  Expensive to keep the same weightings inn the actual portfolio as it is in the index

Mitigation: Derivatives

• risk that the assets do not move inline with the investment or economic index borne is borne by the life
• Default risk
• INABILITY TO MANTAIN THE PREMIUM
• inflation and thus insufficient to meet the nneeds overtime( without profits)