Hi, In this question discussing contingency margins for a 20 year without profit term assurance, the memo refers to lapses as follows: Question: A life insurance company is reviewing the adequacy of premium rates for a range of contracts. Discuss the extent to which margins against adverse contingencies are required in the following cases. Where you think margins are required, state with reasons how and where in the basis the margins might be applied. (a) Twenty-year without-profits term assurance. Part of memo: "Maybe also assume high lapses early on when the earned asset share is negative, and low lapses later on to guard against the effect of selective withdrawal (ie only the fit lapsing)." I understand assuming high lapses early on, but why would we assume low lapses later on? how does it protect against selective withdrawal?
Hi Y Chen Selective lapses increases the expected mortality claims, so we would use a higher mortality assumption and have bigger per policy reserves. By assuming lower lapses we are assuming more policies in force. So the total reserve (assumed number of policies multiplied by per policy reserve) is bigger. Best wishes Mark
