chapter cnpc(4)

7/25/2019 Chapter CNPC(4)

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CONVENTION

PARTICIPATCONTRA


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INTRODUCTION

The main structural basis of products CONVENTIONAL WITHOUT PO!IT" # charac

full% &uaranteed bene'ts and usuall% le(premiums

WITH)PO!IT" # a polic% *here the polic%hold

entitlement to part or all of an% future surparises under the contract+ UNIT LIN,E- PO-UCT" # a polic% *here the b

lin.ed directl% to the in(estment performaspeci'ed fund and characteri$ed b% a lo*e

&uarantees on bene'ts and premiums IN-E/)LIN,E- # a polic% *here the bene'ts


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INTRODUCTION

The t%pe of basis used for a product has important implicat

The cost of the product1 and the ris.s of the product1 to thpolic%holder

The amount of 2e0ibilit% that is possible in the product de

The ris. of the product to the insurance compan%1 includicapital re3uirements and the potential for pro't


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INTRODUCTION

The Capital e3uirement *ill depend on4 The desi&n of the contract The fre3uenc% of pa%ment of the premium The relationship bet*een the pricin& and super(

reser(in& bases The le(el of the initial e0penses


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INTRODUCTION

Initial Capital "train 4the combination of the initial cash out2o*1 the neprudent reser(es and the need to establish asol(enc% mar&in means that mone% has to be fou

in order to *rite the business+


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INTRODUCTION

!ormula4

Where 5C0+ 6 Capital "train at time

V0+6 "uper(isor% reser(es and minimum sol(enc% mar&

time 78

E0+6 E0penses and commission incurred b% time 78P0+6 Premium paid b% time 78

Time 78is the point immediatel% after the polic% has been

after the 'rst premium has been paid and all the initial e0


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OPERATIONS OF FUND

!i&ure9+ Illustrations on ho* a nonpro't fund operates+


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The Risks Involved

The main ris.s relatin& to these contracts in(ol(e4

Investment Retuns ) The bene't is &uaranteed1 anachie(ed in(estment returns are lo*er than allo*ed premiums then the insurance compan% *ill ma.e a losthin&s bein& e3ual+

E!"enses - E0pense ris. in that the actual mar&inadministerin& the contract need to be met+ The mar&inacontract are those costs *hich are incurred becausee0ists+ E0penses mi&ht pro(e hi&her than e0pectedreasons1 for e0ample because of hi&her than e0pein2ation1 or because of lo*er than e0pected sales of bus


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The Risks Involved

#ithd$%$ls ) When the asset share is ne&ati(e :mos

be ne&ati(e in the 'rst fe* months or %ears of a re&ularcontract1 because of hi&h initial e0penses;1 there is aris. from *ithdra*al+ At other times1 *hether there is sdepends on ho* an% *ithdra*al bene't paid comparesasset share+

&ot$lit'# there *ill be a si&ni'cant mortalit% ris. atof the contract1 but this *ill reduce as duration increases+(Includin& anti)selection ris.;A mortalit% ris.arise from selecti(e *ithdra*als+ The polic%holders mos*ithdra* from the contract are those in &ood health1 leinsurance compan% *ith a sub)standard &roup of li(es+


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C$"it$l Re)uiement

The capital re3uirements of the business depend cruciall%

Cont$*t Desi+no The .e% issue in contract desi&n1 is *hether the de

reser(es and sol(enc% mar&in re3uirements to be .ept loo The lo*er the initial reser(es1 the lo*er the i

re3uirement+ The slo*er the increase in reser(es o(er tterm1 the faster an% in(ested capital is released+ This is

interacts *ith the issue of ho* super(isor% reser(es are Pemium P$'ment Fe)uen*'o !or non)participatin& contract1 the follo*in& is the order

capital re3uired4 e&ular monthl% premium :most capital needed;+ e&upremium+

"in&le premium :least capital needed;+


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C$"it$l Re)uiement

The capital re3uirements of the business depend cruciall%

Rel$tionshi" ,et%een the Pi*in+ $nd Su"eviso'$seso If the reser(in& basis is stron&er than the pricin& ba

premium char&ed *ill seem insu=cient1 on the reser(meet the e0penses and the bene't+ Capital *ill thereforto set up the re3uired reser(es at outset+ The stron&er t

basis compared *ith the pricin& basis1 the more capita"ince super(isor% reser(es ha(e to be prudent1 thestron&er than the pricin& basis1 and this is a si&ni'canto the total capital re3uirement+

Level o. Initi$l E!"enses/o The hi&her the le(el of initial e0penses the less the

share *ill be+ If nothin& else chan&es1 then clearl% this


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Settin+ Assum"tions .o Pi*in+

Demo+$"hi* Assum"tions :relates to mortalit% rates;

The actuar% *ill consider the compan%


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Investment etun

This *ill be set bearin& in mind the si&ni'cance of reser(econtract1 the e0tent of in(estment &uarantees1 the importarein(estment and the intended asset mi0 for the contract+ of ta0ation must be considered+

#ithd$%$ls The assumption *ill ta.e as a start point the most recent i

for that contract or related contracts1 or1 in the absence ofdata1 industr% statistics+

&$+ins Is re3uired to reduce the 'nancial impact on the compan%

e0perience and pro(ide a suitable return to the pro(iders o


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E!"enses $nd *ommissionNeed to re2ect the incidence of the follo*in& mar&inal e0pen initial ac3uisition :eg initial commission and related sales c initial medical under*ritin& initial administration rene*al administration rene*al re*ard to sales channel :ie rene*al commission1 o

in(estment *ithdra*al @ paid)up e0penses claim @ maturit% administration :often .no*n as terminatio

e0penses;+E!"ense in0$tion This *ill depend on e0pected future earnin&s in2ation+ It m

consistent *ith the in(estment return assumption+


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Resevin+ $nd Po1t Re*o+nition

ReseveThe amount of assets that the life o=ce needs to hold at point in time :the (aluation date; such that1 allo*in& for futuincome and for the anticipated returns from in(estment1 thethe life o=ce *ill be met as the% fall due+

The liabilities of the life o=ce can be de'ned as The obli&ations that the compan% has under the contracts

force to pa% bene'ts accordin& to the term of those contrac The e0penses that the life o=ce *ill incur in the future

administer the contracts of insurance it holds+ The obli&ation to pro(ide a return to those *ith a sta.e in t

for the capital that the% ha(e pro(ided5 that is to the

polic%holders and@or shareholders1 as appropriate


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C$se Stud' 2


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C$se Stud'

Assumptions4 Premium e0cludin& pro't mar&in :best estimate premiu

All e0penses are assumed to occur at the be&innin& of earespecti(e polic% %ear1 *hile all claims are assumed to bthe end of each %ear

971777 identical policies are issued at time t67 The actual e0perience is e0actl% the same as that e0pect

accordin& to the premium basis+

The accumulation of the fund is described b% the follo*in !t89 6 !t8 Pt 8 It # Et # Ct

Where1

!t # the assets :fund; accumulated b% the be&innin& of %

Pt 1 It 1 Et 1 Ct # the total premium income1 in(estment in

e0penses and claim out&o incurred durin& %e


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C$se Stud'

The premium e0cludin& pro't mar&in 6 BDD+Total premium 6 B7F+G

!ill in the blan. and produce the solutions b% usin& e0ce

chapter cnpc(4)

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