Life Insurance
Life Insurance tests mortality and longevity risk end to end: product design, underwriting, pricing, reserving, capital and fair treatment of policyholders. The UK market is dominated by term assurance, whole life, unit-linked bonds, with-profits and annuities, so you must move fluently between a benefit illustration, a reserve and a Solvency UK balance sheet.
Products and where the risk sits
- Protection (term, whole life, convertible and renewable options): mortality risk, underwritten at outset; guaranteed rates transfer the risk to the insurer.
- With-profits: smoothed bonuses, asset shares, the inherited estate, the PPFM and the WPICC; the insurer runs equity and interest-rate risk on policyholders' behalf.
- Annuities: longevity risk plus interest-rate and inflation risk; once purchased the rate is fixed and there is generally no surrender value.
Reserving and capital
- Net premium reserves ignore expenses, so Zillmerisation or a gross premium valuation is needed where initial costs are heavy.
- Solvency UK: best estimate liability plus a risk margin (4% cost of capital), with a matching adjustment where assets and liabilities are matched.
- SCR stresses include mortality (pandemic), longevity, mass lapse, expense and, for annuity portfolios, spread and default risk.
Worked example
A 65-year-old pays GBP 100,000 for a level annuity. At a 3% valuation rate the annuity factor is 22, giving GBP 4,545 a year. If mortality improvements are recognised and the factor falls to 20, the same money buys GBP 5,000 - a 10% rise in cost. Interpretation: a small change in assumed future mortality moves annuity prices by several percent, which is why CMI projections and basis risk dominate this market.
Traps
- Using crude qx with no mortality improvement or cohort effect.
- Pricing term assurance as if options (convertible, renewable) were never exercised.
- Producing negative reserves through initial expenses without Zillmerisation.
- Ignoring the value of guarantees and the estate in with-profits.
- Confusing unit fund value with death benefit in unit-linked business.