(Papers) ACET Paper May 2010 "ST2 – Life Insurance "
Q. 1) A company sells only non participating term insurance
business. The company reinsures the policies on its books on a risk premium
constant retention basis whereby death benefit at risk above a specified
retention limit is ceded to the reinsurers.
i) The company has calculated the reinsurance premium due for
the recent quarter. Mention the checks you might apply in order to ensure
consistency, accuracy and completeness of the reinsurance premium calculations.
ii) The company plans to launch a new non participating term
product targeting lower socio-economic segments of the society for the first
time. Death benefits are likely to be much lower than the current retention
limits of the company. Explain the reinsurance arrangement the company might use
to reduce its risks under this product
Q. 2) A life insurance company promotes a limited payment
unit-linked contract with the following features:
A death benefit of 105% of fund value of units
Surrender benefit of 100% of fund value of units
Initial commission of 15% of the first year’s premium; renewal
commission of 1% in years 2 and 3
Policy term of 10 years with a premium payment term of 3 years
Maximum entry age 65
No medical underwriting
The charges under the contract are:
Initial charge of 10% of one year’s premium
Fund management charge at the rate of 1% per annum of the value
of units, charged by deduction of units at the beginning of each month
i) Discuss the risks to the company of selling this product
To improve the competitive position of this product in the
current economic downturn, the company proposes to introduce a ‘watermark’
guarantee in which the unit price at maturity is guaranteed to be not less than
the highest unit price recorded on any day during the 10-year term of the
policy. The fund will be close-ended and will be invested in a mixture of
equities and bonds. This guarantee is available only on maturity and not on
earlier death or surrender.
ii) Discuss the additional risks to the company of this
The company operates in a country where insurance companies are
prohibited from using derivatives. Further, the company is very risk averse and
wants to keep the risks to a minimum without compromising the competitiveness of
iii) Explain the investment strategy that the company would
adopt in such an environment to manage the additional risks arising from this
Q. 3) In the context of the supervisory valuation of a life
i) State the principles of setting supervisory reserves for
Realistic reserves i.e. reserves without any prudential margins
are sometimes used by management for measuring company’s financial performance
and rewarding key staff.
ii) State the main reasons why these realistic reserves might be negative at the
start of a contract
iii) Explain why a premium pricing basis can sometimes be stronger than the
Q. 4) The insurance regulator of a developing country has
recently published a report on the persistency experience in the industry. A
life insurance company, which has been writing predominantly unit-linked
business ever since it commenced operations four years ago, has found that its
persistency experience is the worst in the industry and is also much worse than
that assumed in its pricing basis.
i) Discuss the possible reasons for the poor persistency
experience of the company.
ii) Discuss why poor persistency may be taken seriously by the management of the
Q. 5) Regulations surrounding unit pricing and allocation in
a certain Asian country have recently been changed requiring a company selling
unit linked contracts to allocate/de-allocate units to policyholders on the same
day’s unit price as the cash/cheque for renewal or request for
surrender/cancellation is received. A company operates sales offices all around
this geographically diverse country where such requests are received but
processing takes place at a single central location in batches
i) State the basic equity principle in unit pricing for
internally linked funds As a result of compliance with the new regulations, the
company is experiencing gains and losses in shareholder account in order to
maintain existing policyholder’s equity.
ii) Explain why such a gains and losses might occur
The stock markets have become more volatile as a result of the
recent financial crises. The Board of Directors has asked for a plan to minimize
these gains and losses on the shareholders’ account.
iii) The Chief Operating Officer has in turn approached you to
come up with a range of steps that might be taken to overcome this situation.
Mention the steps you would outline in your advise to the COO
The company has been using appropriation price for unit pricing.
Recent financial crises have reduced Unit Linked Insurance Plans (“ULIP”) sales
to a minimum and a significant proportion of existing policyholders have started
surrendering their policies.
iv) Explain the changes that need to be incorporated in the unit
pricing bases to maintain policyholder equity