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Miscellaneous questions/Study buddy

1

1495_sc

Ton up Member
Hello,

I had a bunch of questions while going through the Core Reading. Can someone please help? Listing the questions below. The text in italics are from Core Reading material.

1. The asset share will not tend to the maturity value if the guaranteed amount at maturity is greater than the asset share
What does this essentially mean? Is it simply stating the obvious in the sense that if asset share due to poor investment performance (for example) is low, it will not tend to maturity value? What happens to the asset share once the policy is mature and why are we concerned about the asset share after maturity?

2. Why is profit after alteration of a contract expected to be same as that before alteration? As the contract's terms and conditions (face amount and nil premium) will change post alteration, why are we expecting profit to be same before and after?

3. In the context of EV's profit component, how can risk be allowed for by "deducting" a risk margin in the risk discount rate? Deducting margin>low RDR> higher surplus> optimistic, not prudent. Referring to the last point in Chapter 18's (Setting Assumptions (2)) summary.

4. Amongst the principles for paid-up contracts, why should it 'be consistent with the surrender value such that surrender value before and after conversion are approximately equal'? I understood that consistency with surrender value is important but not the remaining principle.

5. How is negative non unit reserve a 'loan' from other contracts which have a positive non unit reserve?

On this note, I am also open to having a study buddy just for QnA and revision. I am in India and we can coordinate on weekends.

Look forward to knowing answers. Thank you in advance!
 
1495_sc said:
Hello,

I had a bunch of questions while going through the Core Reading. Can someone please help? Listing the questions below. The text in italics are from Core Reading material.

1. The asset share will not tend to the maturity value if the guaranteed amount at maturity is greater than the asset share
What does this essentially mean? Is it simply stating the obvious in the sense that if asset share due to poor investment performance (for example) is low, it will not tend to maturity value? What happens to the asset share once the policy is mature and why are we concerned about the asset share after maturity?

2. Why is profit after alteration of a contract expected to be same as that before alteration? As the contract's terms and conditions (face amount and nil premium) will change post alteration, why are we expecting profit to be same before and after?

3. In the context of EV's profit component, how can risk be allowed for by "deducting" a risk margin in the risk discount rate? Deducting margin>low RDR> higher surplus> optimistic, not prudent. Referring to the last point in Chapter 18's (Setting Assumptions (2)) summary.

4. Amongst the principles for paid-up contracts, why should it 'be consistent with the surrender value such that surrender value before and after conversion are approximately equal'? I understood that consistency with surrender value is important but not the remaining principle.

5. How is negative non unit reserve a 'loan' from other contracts which have a positive non unit reserve?

On this note, I am also open to having a study buddy just for QnA and revision. I am in India and we can coordinate on weekends.

Look forward to knowing answers. Thank you in advance!
Click to expand...
Hello

1. Yes, just stating the obvious here. We aren't interested in the asset share once a policy has finished.

2. This won't always be true. It will depend on the situation, so will only be true in the situation given in that piece of text. Not sure where you have this from.

3. You have misinterpreted the summary. It says:

"Risk can be allowed for by using a risk discount rate that is higher than the risk-free rate, or by deducting a risk margin."

So we either increase the RDR as you suggest, or we deduct a risk margin from the embedded value. We don't deduct the risk margin from the RDR.

4. The insurer will want to avoid the situation where a policyholder can surrender for 1000, but then decide to alter the contract and then immediately after surender for 1100.

5. Contract A has reserve of -20 and contract B has reserve of +30. So overall the insurer only holds assets to cover reserves of 10. So contract A owes money to contract B as we still need 30 to pay out B's benefits. The good news is that contract A will pay premiums/charges in the future that are larger than its outgo and can therefore pay the loan back to B.

Best wishes

Mark
 
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