Life Insurance and Pensions Practice
Life Insurance and Pensions Practice
This domain tests product design, pricing, reserving and solvency for life insurance and pension arrangements. It expects candidates to connect mortality, interest, expense and lapse assumptions to premiums, policy liabilities and pension funding.
Core rules and concepts
- Life products include term assurance, whole life, endowment, annuities and unit-linked or with-profits contracts.
- Pricing uses best-estimate assumptions plus margins for risk and profit; reserves use prudent assumptions and contract boundaries.
- Pension schemes are DB or DC. DB funding compares assets with projected liabilities; DC outcomes depend on contributions and investment returns.
- Guarantees, options and policyholder behaviour create optionality and must be valued.
Worked example
A one-year term assurance pays INR 1,000,000 on death. Mortality q = 0.0015, so expected claim = 1,500. Per-policy expenses = 600 and required profit/risk margin = 400. An expense loading of 10% of premium applies. Solve P = 1,500 + 600 + 400 + 0.10P, so 0.90P = 2,500 and P = 2,778. The reserve later reflects unexpired risk and prudent assumptions, not the pricing margin.
Traps
Using only best-estimate mortality, ignoring lapse or guarantee costs, double-counting expense inflation, and treating a DC pot as a guaranteed pension. Also confusing accounting reserves with solvency capital.