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How do with-profit and unit-linked contracts affect guarantees?

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asked Nov 9, 2017 in BUS 4027W - Actuarial Risk Management by Rowan (4,010 points)

One way to minimize guarantees is for providers to sell with profit or unit linked contracts instead of without profit contracts. How does this reduce guarantees?

1 Answer

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answered Nov 9, 2017 by ErichMaritz (500 points)

EM: Here you can compare non-profit, unit-linked and with-profit contracts with regards to (a) what % of the assets back known nominal liabilities (i.e. guarantees) and (b) how is investment return allocated. In all three cases, consider the assets to be invested in a balanced fund.

The non-profit product has 100% of assets backing the known nominal pay-out. Any profit/losses are carried by the insurer, every accounting period.

For the unit-linked product, there is no known nominal liability. The liability is defined in terms of the assets. So there is no nominal guarantee. Promising to pay out assets in a fund does not constitute a guarantee in this context.

For a with-profit contract, bonuses granted may not vest immediately, and so the % of assets that back nominal guarantees is less than 100%.