Risk(2) Question 11.5

[Sayantani]

Hi,
In the solution to 11.5 under mortality risk, it is mentioned that there is a small mortality risk as the death benefit will exceed the asset share for a number of years.
This makes sense but then it is mentioned that the sum at risk is small and the mortality rates are likely to be low as there is no anti-selection.
What I don't understand is that the sum at risk which is the (Sum assured - Unit Value) is mentioned to be small. But in this product design there should not be a sum at risk because the sum assured is basically the bid value of the units which should make the difference zero. Am I missing something here?

 

[Mark Willder]

Hi,
In the solution to 11.5 under mortality risk, it is mentioned that there is a small mortality risk as the death benefit will exceed the asset share for a number of years.
This makes sense but then it is mentioned that the sum at risk is small and the mortality rates are likely to be low as there is no anti-selection.
What I don't understand is that the sum at risk which is the (Sum assured - Unit Value) is mentioned to be small. But in this product design there should not be a sum at risk because the sum assured is basically the bid value of the units which should make the difference zero. Am I missing something here?

Hi Sayantani

Yes, you're right that there's no sum at risk from the unit fund as the contract pays out exactly the unit fund on death.

However, the unit fund will be bigger than the asset share for the first year or so. The only charge is the fund management, which will be small at first as the contract is regular premium, so the charges will not be enough to cover the initial expenses for a while. So the death strain relates to unrecovered expenses. A good indication that there are unrecovered initial expenses is the existence of a surrender penalty.

Best wishes

Mark