Institute and Faculty of Actuaries (IFoA) Exams Life Insurance Specialism (SP2 and SA2) Syllabus

Life Insurance Specialism (SP2 and SA2) syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Life Insurance Specialism (SP2 and SA2) in Institute and Faculty of Actuaries (IFoA) Exams, not a summary of it.

1. 1

   Life Insurance Products and Pricing

   3 topics

   • Product types
     • Conventional with-profits and non-profit contracts
     • Unit-linked and unitised with-profits
     • Protection: term assurance, income protection, critical illness
   • Pricing methodology
     • Equation of value and profit-testing pricing
     • Setting demographic and economic assumptions
     • Risk discount rate and profit criteria
   • Reinsurance arrangements
     • Quota share, surplus and risk premium reinsurance
     • Financial reinsurance and risk transfer
2. 2

   Reserving and Valuation

   3 topics

   • Supervisory reserving
     • Best estimate liabilities and risk margin
     • Contract boundaries and future premiums
   • Embedded value reporting
     • Components of embedded value
     • Analysis of movement in embedded value
   • Analysis of surplus and profit
3. 3

   Capital Management and Solvency II for Life (SA2)

   3 topics

   • Solvency II framework
     • Pillar 1: technical provisions and the SCR/MCR
     • Standard formula vs internal models
     • Matching adjustment and volatility adjustment
   • With-profits management
     • Bonus distribution and smoothing
     • Principles and Practices of Financial Management (PPFM)
     • Treating customers fairly and policyholder reasonable expectations
   • UK regulation and reporting
     • PRA and FCA regulatory roles
     • ORSA and risk governance

Life Insurance Specialism (SP2 and SA2) flashcards for Institute and Faculty of Actuaries (IFoA) Exams

20 of 68 cards from the Life Insurance Specialism (SP2 and SA2) deck — real questions with worked answers.

1. What are the three main categories of life insurance product, classified by benefit type?

   1) Protection products (e.g. term assurance, critical illness, income protection) paying on a defined contingency; 2) Savings/investment products (e.g. endowments, unit-linked bonds) accumulating a fund; 3) Annuities (income in payment). Many products blend protection and savings.

2. Distinguish a conventional with-profits contract from a unit-linked contract in terms of where investment risk sits.

   Under conventional with-profits the office bears the investment risk and smooths returns to policyholders via bonuses. Under unit-linked the policyholder bears the investment risk directly through the value of allocated units; the office's risk is mainly expense and mortality.

3. Define a term assurance and state its key product feature.

   A term assurance pays a death benefit only if the life assured dies within a fixed term; it has no maturity value and (usually) no surrender value. It is pure protection, typically with low premiums relative to the sum assured.

4. What is an endowment assurance?

   A savings-plus-protection contract paying a sum assured on survival to the end of the term OR on earlier death. It combines a maturity benefit with life cover and builds a surrender value.

5. Distinguish an immediate annuity from a deferred annuity.

   An immediate annuity begins paying income shortly after a single premium is paid. A deferred annuity has a deferred (accumulation) period before income payments begin, allowing a fund to build up first.

6. What is the defining risk an insurer takes on when writing an annuity, and how does it differ from term assurance risk?

   Annuities carry longevity risk (annuitants living longer than expected, increasing cost). Term assurance carries mortality risk (deaths higher than expected). They are opposite exposures, which can provide natural hedging across a portfolio.

7. State the equivalence principle used to set a net (risk) premium.

   The premium is set so that, at outset, the expected present value of premiums equals the expected present value of benefits: $$EPV(\text{premiums}) = EPV(\text{benefits}).$$ The net premium ignores expenses; the office (gross) premium adds expenses and margins.

8. Write the net premium equation for a level annual premium $P$ on a whole life assurance of sum assured $S$ issued to a life aged $x$.

   $$P \, \ddot{a}_{x} = S \, A_{x} \quad\Rightarrow\quad P = \frac{S\,A_{x}}{\ddot{a}_{x}}$$ where $A_x$ is the whole-life assurance EPV and $\ddot{a}_x$ the annuity-due EPV.

9. Name the main components built into a gross premium (office premium) beyond the expected cost of claims.

   Expenses (initial, renewal, claim and investment expenses), commission, a margin for profit, the cost of capital/contingencies, allowance for the cost of options and guarantees, and allowance for tax.

10. What is the equation of value used in gross premium calculation?

    $$EPV(\text{premiums}) = EPV(\text{benefits}) + EPV(\text{expenses}) + EPV(\text{profit/cost of capital}).$$ Solved for the office premium $P$ using best-estimate-plus-margin assumptions.

11. What is a profit test, and what does it produce?

    A profit test projects expected cashflows of a model point year by year on realistic assumptions, then discounts the resulting profit signature at a risk discount rate. It produces measures such as net present value (NPV), profit margin (NPV/EPV of premiums) and internal rate of return.

12. Define the 'profit signature' in a profit test.

    The profit signature is the vector of expected (post-survival-probability) profits emerging at the end of each future policy year, allowing for the probability of the policy still being in force. Discounting it at the risk discount rate gives the NPV.

13. What is the risk discount rate (RDR) in a profit test, and what does it reflect?

    The RDR is the rate at which projected profits are discounted to assess profitability. It reflects the return required by the provider of capital, including a margin above the risk-free rate for the riskiness/non-diversifiable risk of the cashflows.

14. Why are profit margins often expressed relative to premium income rather than absolute NPV?

    A margin (NPV as a percentage of the EPV of premiums) standardises profitability across products of different sizes and durations, making relative profitability comparable and supporting pricing decisions independent of volume.

15. What is meant by the 'new business strain' (or capital strain) of a contract?

    New business strain is the net outgo at outset (initial expenses, commission and reserves set up exceeding the first premium), producing an initial negative cashflow that must be financed by capital before profits emerge later.

16. List the four main functions/purposes of reinsurance for a life office.

    1) Limiting/smoothing claim volatility and protecting against large or accumulating losses; 2) Increasing capacity to write large risks; 3) Reducing capital strain / financing new business; 4) Accessing reinsurer expertise (underwriting, pricing, new markets).

17. Distinguish proportional from non-proportional reinsurance.

    Under proportional reinsurance the reinsurer shares a defined proportion of premiums and claims (e.g. quota share, surplus). Under non-proportional reinsurance the reinsurer pays only claims (or aggregate losses) exceeding a retention/threshold (e.g. excess of loss, stop loss).

18. Explain quota share reinsurance.

    Quota share is proportional: the reinsurer takes a fixed percentage of every risk in the portfolio, receiving that percentage of premiums (less commission) and paying that percentage of every claim. Simple to administer but cedes premium on good and bad risks alike.

19. Explain surplus reinsurance and how it differs from quota share.

    Surplus is proportional but the cession varies by policy: the office keeps a chosen retention per life and cedes only the excess sum assured above it. Unlike quota share, small risks may be fully retained while only the surplus on large risks is reinsured, giving more efficient retention of premium.

20. What is original terms (co-insurance) reinsurance versus risk premium (YRT) reinsurance?

    Original terms reinsurance shares the original premium and reserves in proportion (reinsurer participates as if a co-insurer). Risk premium (yearly renewable term) reinsurance charges a mortality risk premium each year for the reinsured sum at risk only, with no sharing of the savings element.

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