AWP and UWP

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Simran
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26 Jul 2018, 14:19

Difference between AWP and UWP contracts?
I know the basic concepts of both but I want to know which is better and under which terms.

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Last edited by Simran on 26 Jul 2018, 14:19, edited 1 time in total.

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Mayank
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26 Jul 2018, 22:34

Thanks for posting it here, it was really a great stuff fron ST2 to go through! Found the answer somewhere so here it is with great explanation!

Both unitised and non-unitised AWP work in exactly the same way in this respect.

The benefit will be based on the fund value. The fund value will be the premiums less charges rolled up with the regular bonuses.

A simple example may help. Consider an annual premium of 50. The charges are 10% of the premium plus a deduction of 5 from the fund at the start of each year. The bonuses are 4%.

So the guarantee at time zero is 50 - 0.1x50 - 5 = 40

The guarantee then rolls up with bonuses to the end of the year to be 40 x 1.04 = 41.6

We then add on another premium and deduct charges to get a guarantee of 41.6 + 50 - 0.1x50 - 5 = 81.6

This then rolls up with bonuses to the end of the year to be 81.6 x 1.04 = 84.864 and so on.

Different contracts will have different charges, and so the explicit relationship between premiums and benefits will be different. However, we can see that the guarantees are directly related to the premiums paid.

A unitised AWP contract may then go one stage further and break this guarantee into a number of units and a unit price. 

Imagine that the unit price is 1 at outset and that bonuses are added to the unit price.

Guarantee = number of units x unit price

Guarantee at time 0 = 40 = 40 units at price of 1 per unit

Guarantee at time 1 (before premium) = 41.6 = 40 units at price of 1.04 per unit

Guarantee at time 1 (after premium) = 81.6 = 78.4615 units at price of 1.04 per unit

and so on.

If we are declaring bigger bonuses in AWP, then how is the guarantee smaller? Do you mean in present value terms, the guarantee is lower than in CWP?

No, I actually mean the opposite. To make a fair comparison between the AWP and CWP guarantees we should discount the CWP guarantee. However, policyholder won't do this, so they think that CWP guarantees are bigger than AWP guarantees (when really they are not). As a result, policyholders demand bigger AWP regular bonuses to compensate.

So the result is that the AWP guarantees are bigger than CWP in present value terms, but policyholders actually believe that CWP guarantees are more valuable.

Source : https://www.acted.co.uk/forums/index.ph ... fits.8605/

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Mayank Goyal
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