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Product Design

A

AKS01

Very Active Member
Hi,
In the chapter notes under section 1.3 (competitiveness) there is a question that states "Explain whether the premium level is likely to be more significant for the revalorisation or contribution method?"

The solution states that it is the revalorisation method - the reason being that only the investment profit is released to policyholders. Where as contribution method releases all three major sources of profit i.e. investment, expense and mortality.

Can you elaborate on the reasoning behind this? Why would that mean the premium level on revalorisation is more competitive?
 
AKS01 said:
Hi,
In the chapter notes under section 1.3 (competitiveness) there is a question that states "Explain whether the premium level is likely to be more significant for the revalorisation or contribution method?"

The solution states that it is the revalorisation method - the reason being that only the investment profit is released to policyholders. Where as contribution method releases all three major sources of profit i.e. investment, expense and mortality.

Can you elaborate on the reasoning behind this? Why would that mean the premium level on revalorisation is more competitive?
Click to expand...
Hello

Thanks for the question.

Let's consider an endowment assurance.

For without-profits policies the benefit is fixed at the sum assured. So if the insurer makes a very prudent pricing assumption, the premium goes up for a given level of benefit, making the policy less competitive.

The same is true for the revalorisation method. Any investment surplus is shared with the policyholder, but typically the mortality surplus is not. So a prudent mortality assumption leads to a higher premium, but the policyholder does not receive any surplus when mortality experience turns out to be better than the pricing basis.

However, the situation is different for additions to benefits and the contribution methods as a higher premium generally leads directly to higher benefits. So making a prudent pricing assumption for mortality leads to a higher premium, but will also lead to higher mortality surplus and hence to higher bonuses (assuming that mortality surplus is shared with policyholders).

Best wishes

Mark
 
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