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CM1A 2021 September Q11(ii)

T

Tom17

Made first post
Hi,

I would like to ask about two aspects of this question and its solution:

  1. We are comparing PV of maturity benefit and PV of premiums. Why is the PV of expenses not considered as it is also an outgo?
  2. For the maturity benefit, it is assumed that the sum assured paid out will be $93 000. Should the final sum assured be multiplied by reversionary bonuses (1.019231^15)? In part (I), the sum assured for the maturity benefit is 93000*(1.019231^15).
In the end, the answer is still the same, but the values of the PVs are different.

Thank you very much for the clarification!
 
Very sorry Tom that this post seemed to fall through the cracks.

1. The premium has been calculated to cover the expenses and is fixed at the start of the contract. So for the purposes of working out the rate of return we are only concerned with what the policyholder is paying and receiving. Hence we set EPV of premiums = EPV of benefits.
2. The 1.9231% bonuses are an assumption made at the time of pricing. As this is a with-profits contract the actual increases will not be known in advance. Hence, we show that the minimum return they would get is 0.434% in the knowledge that if any bonuses are declared and the maturity benefit grows the rate of return will be higher than this.

Hope this helps.
Joe
 
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