CMFAS M9A Suitability, Sales Process & After-Sales question: policy document states the guarantee ends

CMFAS M9ASuitability, Sales Process & After-Sales

In an ILP, the minimum payout and capital repayment are guaranteed by an unrelated bank (XYZ), and the policy document states the guarantee ends if XYZ is liquidated. This means:

A The client bears no counterparty risk because an insurer issued the policy
B The credit risk rests with XYZ; the guarantee is only as strong as XYZ
C The guarantee is backed by the Deposit Insurance Scheme
D The insurer must always honour the guarantee even if XYZ fails

Show the answer and explanation

Answer: B. The credit risk rests with XYZ; the guarantee is only as strong as XYZ

A guarantee is only as good as the guarantor's financial strength. Because the policy explicitly terminates the guarantee if XYZ liquidates, the counterparty (credit) risk resides with XYZ — without that clause the insurer, as primary party, would have had to honour it.

Common mistake

The explicit termination clause shifts the credit risk to the guarantor bank; it is not a protected deposit.

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Related CMFAS M9A questions

In Case Study 1 the maximum return is capped at 20% while the capital is protected (barring the owner's own early termination or failure of guarantor XYZ). Beyond the early-redemption/reinvestment risk, this feature illustrates that the policy owner A client holds a capital-guaranteed structured ILP and, needing cash, asks to redeem units well before maturity. Besides any mark-to-market cost, what key consequence must the Adviser flag?A structured ILP policy document discloses the upfront sales charge but omits an ongoing administrative charge that the insurer in fact deducts. Why does this fall short of the inception-disclosure requirements?

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