We study the problem of valuating life insurance contracts in the presence of taxes and future profits. The basic framework consists of the classical finite state Markov chain model describing the possible states of the policy-holder and a stochastic model for the financial market. One approach to model the liabilities is to introduce a full simulation model for the relevant states of the policy holder and the payments associated with the contracts. We discuss how one can alternatively adopt analytical methods such as Thiele's differential equation for the state wise reserves and Kolmogorov's forward equations for the transition probabilities for determining the market values of the various cash flows arising from the contracts. More precisely, we determine the tax cash flows for guaranteed and unguaranteed payments, tax payments and future profits for the owners. We also discuss how the market values of the cash flows can be determined without explicitly deriving the underlying cash flows. The cash flows for unguaranteed payments, taxes and profits will typically depend on the term structure, which is uncertain. We refer to these cash flows as term structure dependent cash flows.
We start by covering the key risks in retirement, such as interest rate risk, inflation risk, investment and reinvestment risk, and longevity risk. We then look at the components of a retirement financial strategy: investment strategy, the strategy for investing the pension pot; withdrawal strategy, the strategy for withdrawing cash from the pension pot to finance expenditures; and longevity insurance strategy. A good product for delivering retirement income needs to offer: accessibility, a degree of flexibility to withdraw funds on an ad hoc basis; inflation protection, either directly or via investment performance, with minimal involvement by individuals who do not want to manage investment risk; and longevity insurance. It is difficult for a single product to meet all these requirements, but a combination of drawdown and a deferred (inflation-linked) annuity does, for example. So a well-designed retirement income programme will have to involve a combination of products. Next we discuss the withdrawal strategy, and note that there is no safe fixed withdrawal rate that guarantees to last for the lifetime of the retiree (apart from a life annuity). Alternatives are: withdraw the annuitised value of the fund each year, known as the ‘equivalent annuity’ strategy; draw only the ‘natural’ income from the fund, defined as the ‘pay-out of dividends from income-generating investments’; auto-rebalancing, withdraw from asset classes that experienced the highest growth during the year; and cashflow reserve (or bond) ladder or bucket, hold enough in deposits or short-maturing bonds to meet the next two years of expenditure. We then consider the longevity insurance strategy, which determines when longevity insurance is purchased and when it comes into effect. The essentially boils down to the choice between: buying and immediate annuity when it is needed, and buying a deferred annuity at the point of retirement, with the deferred annuity beginning to make payments when it is needed. We end by designing a default retirement income/expenditure plan.
Genetic testing for inherited heart disorders (cardiomyopathies) is becoming widespread. In countries where genetic test results are admissible for insurance underwriting, genetic councellors are believed to advise clients to obtain life or health insurance before taking a genetic test for a suspected cardiomyopathy. Using Hypertrophic Cardiomyopathy (HCM) as an example, we consider the implications for insurance, especially as regards pre-existing conditions and diagnostic as opposed to predictive genetic testing.
We discuss the design of pension products. The theoretical context is decision making under uncertainty with notions of preferences like risk aversion, habit formation, and resolution of uncertainty. The practical questions we address concern guaranteed benefits, smoothing of investment returns and...would you actually like to know when you are going to die?
The United Nations Joint Staff Pension Fund (UNJSPF) is a 60+ year old defined benefit plan providing retirement, disability, and death benefits to over 120,000 staff members of the United Nations and 23 other international organizations. The Fund pays benefits to over 72,000 retires and beneficiaries in over 190 countries in 15 different currencies. Assets are close to 60 billion $US. This paper provides background on the UNJSPF, focusing on the singular aspects of its governance, plan design, and actuarial and funding approach. The governance of the UNJSPF is bifurcated with assets and liabilities managed separately with technical coordination through asset liability management studies. The United Nations General Assembly has ultimate responsibility for the UNJSPF but has created a tripartite Pension Board and a secretariat to administer the Fund. Assets are managed mostly internally, under the responsibility of the United Nations Secretary-General. Key provisions of the UNJSPF consist of a benefit formula based on final average remuneration and service, with some variants regarding accrual rates, retirement age and payout options. In particular, the Fund has a unique two track system which allows retirees to receive benefits in local currency but comparing the value of their original benefit established in US dollars. The UNJSPF actuarial approach includes establishing its own actuarial assumptions, long-term open group funding method and sophisticated approach to determining the value of its two track system. There is an objective of maintaining constant the contribution rate. Finally, a Committee of Actuaries, as well as an Investment Committee and an Audit Committee are involved to assist the stakeholders.
Shared Value Insurance is a category of insurance which aims to incentivize risk reducing behavior amongst policyholders. The reduction in risk delivers higher margins to the insurer, and the benefits of increased margins are then shared with both shareholders and policyholders. This presentation explains the mechanism of Shared Value Insurance, shows evidence of how policyholders engage with the incentivized wellness program, and how this in turn delivers value to both the insurer and to policyholders. Data will be shared on how the concept has been applied in Health, Life and Short Term Insurance, and how engagement behavior changes over time at population level. The impact of various risk reducing behaviors on claims risk (such as regular exercise in the context of Health and Life insurance, and safe driving behavior in the context of Short Term Insurance) will be explained, and the link between incentives and behavior change will also be shown. The presentation shows that, whilst Shared Value Insurance may well be complex and challenging to implement in practice, the value of it justifies the investment - for policyholders, shareholders and society.