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With-profit premiums

+2 votes
asked Aug 17, 2018 in BUS 4027W - Actuarial Risk Management by rohin_jain (1,080 points)

For with-profit contracts, we expect that if the company does well (e.g. mortality or investment profit), this extra profit will be added to the benefit of the policyholders. But, if things go south, will the policyholder also be expected to increase their premium payment for the same benefit?

Is this the same for unit-linked contracts?

1 Answer

+3 votes
answered Aug 19, 2018 by ChrisS (460 points)

Generally when we talk about with-profit contracts, we are saying that the benefit is linked to the profit of the company, not the premiums. So, if the company is doing well, your benefit tends to increase. With-profit contracts tend to work like shares in that the policyholder gets allocated a portion of the company's profit to the policyholder's benefit. But, like with the dividend on a share, once paid they can't necessarily be taken back. Although, note, that this all depends on the term of the contract the policyholder has with the insurer, and that the insurer will likely have accounted for any of these terms in the pricing of the product.

In the case of unit-linked contracts: your benefit is linked to the performance of the fund you are linked to. In this case, your benefit can certainly decrease.

commented Aug 22, 2018 by PBotha (490 points)

yes, perfect :)

Once a "bonus" is declared, depending on the terms and conditions of the contract, it either "vests", which means it becomes guaranteed, or does not vest (yet), which means the insurer has the discretion to take it away if things go south.. However, insurers are very unlikely to take away unvested bonuses because of policyholder expectations and the risk of reputational damage. Normally, not all profits that are deemed to belong to the policyholders are declared as bonuses, so as to smooth returns over time - in good years, not all profits are distributed, and in bad years, more is distributed to reduce overall fluctuations.

Premiums can only be increased if they are "reviewable" or linked to a particular index.

For unit-linked, the policyholder doesn't "share" in the investment and mortality profits of the insurer as with with-profits. Rather, the risks related to investment performance are transferred to the policyholders and they get the upside of good performance, or conversely, the downside from poor performance. The insurer will levy some charges on the investment fund and the policy (for expenses, for any guaranteed benefits in excess of fund value, for profit margin, etc.), but the investment risk mainly lies with the policyholder now (the insurer is indirectly exposed to the investment risk to the extent that charges are linked to the fund value - higher growth, higher charges, and visa versa)

Happy studying! :)