2023

THE UNIVERSITY OF HONG KONG

DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE
STAT3901 Life Contingencies
LN1: Introduction

Traditional Life / Ordinary Life Insurance contracts (OL)

1. Term insurance

(a) Premium pattern: usually level premium, paid until the end of the term or death,
whichever occurs first.
(b) Benefit pattern: a lump sum benefit (usually predefined by the contract) on the death
of the policyholder will be paid, provided that death occurs before the end of a specified
term.
(c) Renewability: depends on product features; if it is a renewable term insurance, then
renewability will be granted at the end of the original term, provided that there is no
further evidence of the policyholder’s health status.
2. Whole life insurance
(a) Premium pattern: usually level premium, paid until a certain age or death, whichever
occurs first.
(b) Benefit pattern: a lump sum benefit (usually predefined by the contract) on the death of
the policyholder will be paid whenever it occurs.

3. Endowment insurance
Note: This product is a mixture of a term insurance and a savings element.
(a) Premium pattern: usually level premium, paid until the end of the term or death,
whichever occurs first.
(b) Benefit pattern: a lump sum benefit (usually predefined by the contract) will be paid
either on the death of the policyholder or at the end of the specified term, whichever
occurs first.
Participating (Par) vs Non-Participating (Non-Par) product
1. Non-par product

• It is a “without-profit” product.
2. Par product
• It is a “with-profit” product.
• The profit earned from the invested premium is shared with policyholder.
• The with-profit arrangement may take the form of cash dividends, reduced premiums or
increased sum assured (called reversionary bonus).

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Modern Insurance Contracts
1. Universal life insurance
Note: This product combines investment and life insurance.
(a) Premium pattern: flexible premium payments determined by the policyholder, as long as
the premium payment is sufficient to pay for the designated sum insured under the life
insurance.
(b) Benefit pattern: a fixed amount of benefit from the life element, plus a variable amount
depending on the performance of the investment fund.
2. Equity-linked insurance

(a) Premiums are invested in an open-ended investment account. At maturity, the benefit is
the accumulated value of the premiums.
i. It has a benefit linked to the performance of an investment fund.
ii. There is a guaranteed minimum death benefit if the policyholder dies before the
contract matures.
iii. It may involve a guaranteed minimum maturity benefit.
iv. It is known as unit-linked policy in UK, segregated fund policy in Canada, or variable
annuity in USA.
(b) Equity-indexed annuity: There is a guaranteed minimum return on their premium. At
maturity, the policyholders receives a proportion of the return on a specified stock index
if it is greater then the guaranteed minimum return.
i. It is generally shorter in term (typically around 7 years). Variable annuity has a term
of at least twenty years.
ii. It is less popular than variable annuity.

Underwriting
• The risk exposure when issuing an insurance contract depends greatly on the applicant’s
condition, for example, age, gender, smoking habits, occupation, hobbies and personal health
history.
• An insurance company needs to collect these types of information to access an applicant’s
risk level, and hence decide whether or not to sell the insurance policy to the policyholder.
• The process of collecting and evaluating such information is called underwriting.
• The rigour of the underwriting process depends heavily on the type of insurance being pur-
chased and on the sum insured. For example, term life insurance generally is more strictly
underwritten than whole life insurance since the risk exposure for term life insurance (includ-
ing whether or not there is a payment and the timing of the payment) is greater than the risk
exposure for whole life insurance (including only the timing of the payment), assuming that
both are having the same sum insured.

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Life Annuities
1. Whole life annuity
(a) Premium pattern: can be single premium or regular premium.
(b) Benefit pattern: regular series of payments until the death of the annuitant.
2. Term life annuity

(a) Premium pattern: can be single premium or regular premium.

(b) Benefit pattern: regular series of payments for some maximum period, provided that the
annuitant survives that period.
Other Insurance Contacts

1. Income protection insurance

2. Critical illness insurance
3. Long-term care insurance

Pension Plans
1. Defined benefit pension
2. Defined contribution pension