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CP1 Apr 2022 Q2

R

Raghib Ishraq

Keen member
Hi,
I do not understand the logic behind the structure of the question, why would the same minimum guarantee (Single Premium) be applicable on 5th and 10th anniversary? Wouldn't you expect the minimum guarantee to go up on the 10th anniversary?

Is there a generic equation that can be used to price such guarantees?

Many thanks,
Raghib
 
The guarantee ensures that the customer never loses the monetary value of their investment - inflation however could be an issue after 10 years! The insurance company can set this guarantee to whatever value they like, and a more generous one would be for the level to rise with time, but that's not how it's defined in the question.

Valuing guarantees can be tricky; the usual methods are stochastic modelling and derivative pricing techniques.
 
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