Hi there, I have several questions concerning the 2 products mentioned in the above question. I think overall I'm not quite sure about their product features, so when I review the standard answers I've got many questions and would like some elaboration here. Especially, in the standard answer to question (v) about considerations when developing the products, 1. "suitability for customer needs" for Product B it says "The product offers guaranteed income which may be desirable in these times of low interest rates. The product leaves the decision up to the customer as to what term(s) to choose. The customer may be unhappy if their funds run out and they have nothing left." Product B in the question is a simple endowment product, with various terms for policyholders to choose. So what does it mean by "funds run out"? The product doesn’t have a fund. It just offers a fixed amount of mature benefit. How can it be running out? 2. "capital requirements" for Product A it says "Also the maturity terms chosen for Product B may not match those needed for Product A". don't get what the meaning here...For Product A, which is an equity release loan basically. Doesn’t it only need capital support at the point of sale? Thus as long as there are premiums collected on B, A should be able to sustain. Why does the term of B matter? 3. "capital requirements" for both products, it says "Neither product appears to easily meet the requirements to achieve the matching adjustment. If the company wants to obtain the matching adjustment it may need specialist advice." I wonder Product B - endowment has possibility: its CF is relatively predictable, backed by fixed income assets of various terms, no? 4. "sensitivity" for Product B, it says "There is an indication that the availability of Product B could be limited". What is the indication here? I can't see where this infer come from... 5. "company reputation" for Product B it says "The company must ensure that the customer understands the difference between this and an annuity which provides an income for life." This is my major question about Product B - why the company offers Product B to replace annuity. From my understanding these two are effectively the same. Product B just breaks down annuity payments into several individual mature benefits. It offers more flexibility as in when the "annuity payments" should come up and how much it should be. Correct me if I'm wrong - by holding this endowment, money is not locked in the same rate for that long as a life-time annuity does? Customers get more flexibility of investing during the period when the guaranteed rate offered by the insurer prevails the market interest rate and can also have the option to quickly switch to interest rate offered in the market when market rate prevails. All due to the relatively shorter term of the endowment. Is this the main difference here? 6. "Taxation" for Product A, it says "taxation of the equity mortgage asset may be complex". I wonder why it is a risk for the insurance company. At maturity, is it the policyholder who sells the house, pays tax and repays insurer the loan amount or is it the insurer who simply takes over the ownership of the house from the policyholder and then be it sell or keep holding the house that is totally at the insurer’s discretion, and be responsible for tax payment on the house? 7. "cross-subsidies" it mentions new business mix risk. Just a general point, not specifically about this question - I wonder if it's because that the demographic distribution could be different from expected. Also maybe only large size exceeds a certain % in NB portfolio that the whole product would be break-even assume small size is a loss and large size makes profit. Is this the so-called “NB mix risk”? 8. "administration" for Product A, it mentions about outsourcing. I wonder if it refers to outsourcing admin function to a specialist house agent. Can you give some examples of the possible outsourcer on Product A please? 9. for product A, it says "Admissibility of assets which is particularly relevant for Product A". Does it mean underwriting on the underlying houses? i.e. evaluating the current value and volatility in future value of the house? Thanks a lot!!
Loads of questions here! I'll worth through them in turn The 'fund' referred to here is the pension fund that the individual is investing into these tranches of endowment assurances (as stated in the preamble to the question). If they purchased an annuity using that fund, the benefits would keep being paid for as long as the customer remained alive. If they purchase Product B, they have a known amount of pension fund to use to purchase these single premium endowment assurances of different maturities. If they use up all those funds to purchase a set of endowments (with terms of their own choosing) and they are still alive by the time the final one has matured, they have no more benefit coverage and so basically have 'run out of funds'.
I agree this is a bit unclear. I think what they are getting at here is that you also have capital tied up in Product B - it doesn't all get released up-front but will get gradually get released over the product lifetime. So you would need to look at the pattern of capital requirements and capital releases for the two products, and there could well be durational or timing mismatches there.
But the customer can surrender Product B, so the cashflows are not sufficiently predictable and there is liquidity risk.
Stated in the question under the heading 'Product B': 'Not all terms to maturity will be available at all times, but will be subject to availability.'
See answer to #1: the endowments will only pay out the chosen fixed benefits amounts on the chosen maturity dates. If the p/h lives much longer than expected, they will run out of money under this approach. Whereas for an annuity, the insurer takes on the longevity risk: the p/h will continue to receive benefits for as long as they live.
This is talking about life insurance company taxation. For example, as it looks like it would be treated as BLAGAB business, what counts as 'I' for the underlying equity release mortgage asset in the I-E calculation? [Bear in mind that the loan is normally repayable when the policyholder dies. So their estate has to repay the loan from the proceeds of the house sale.]
Yes, policy size is a good example of a potential cross-subsidy here (as mentioned in the solution). And yes there might well also be cross-subsidies by age (although the question indicates that there are some variations in product terms by age).
I don't think the outsourcer would have to be a specialist house agent. It simply means outsourcing the administration of the product, which is fundamentally a loan arrangement, to a company that specialises in providing administration / customer services: processing transactions, providing regular customer updates, dealing with customer queries etc.
Admissibility of assets was relevant in the UK prior to the introduction of Solvency II, but is no longer included in the list of product design considerations in the SA2 course. It referred to the extent to which assets were permitted to be included within the Solvency I supervisory balance sheet. In this question, it related to the extent to which the value of equity release mortgage assets generated under Product A could be included.
Thanks Lindsay! For this one, can I say annuities are the most common products that are qualified for MA under Solv II standards? Are there any other typical products which are also eligible for MA?
Thanks Lindsay! Understand that you speak the difference from the insurance company's perspective - why they would offer this tranches of endowments to replace life annuity. And how about from customers' perspective - what are the incentives for them to purchase a tranche of endowments over a life annuity? Would like to know if my above thinking on this is correct or not. Thanks!
So I think the tax is based on proceeds on selling the property. The question says that loan amount is capped at the house value on sales after deduction of sales expense. Does the sale expense include tax? If so then the tax is a risk to the insurance company; otherwise taxation is a risk to the policyholder.
To be on the safe side, I would stick with annuities - since they aren't surrendered, the cashflows are relatively predictable (for a large enough portfolio)
The clues are in the question: offering more flexibility to the customer. The insurer will offer it to be able to sell more products & make more profit. If you look at the Product B description, the attractive features to the customer are as stated: flexibility in being able to vary when they take their benefits (because they can choose different maturity amounts at different dates, and because they can take money out as surrender values too) - rather than having to lock in to a fixed annuity level, 'competitive guaranteed rates of return' and also there being a death benefit (which you don't have on an annuity).
It sounds like you are confusing life insurance company taxation with personal taxation? The life insurance co has a liability to taxation on 'I' in the BLAGAB fund, which in this case is likely to be based on the change in value of the equity mortgage asset over each tax year. Are you confusing this with personal taxation on property sales? Or personal inheritance tax? In the UK, an individual doesn't have to pay any tax when they sell their own personal property. If we are talking about inheritance tax, then that is a lot more complicated - and you wouldn't be expected to know the details, particularly now that SA2 is not jurisdiction specific. In any case, the 'sales expense' referred to is just the cost of selling the property, ie the cost of advisers etc.
