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Hi Mansi There are two different approaches here to valuing the business for purchase: one for short-term business and one for long-term...

Hi Nikki We need to take each question on its merits. So what works for one question won't necessarily work for another in terms of the detail we...

Hi Wong The acronyms are the intellectual property of Institute and Faculty Education and are not for distribution the Forum. Best wishes Mark

Hi George I agree that one of the advantages of underwriting is that it discourages applications from unhealthy people. But the question is...

Hi Yao The policyholder buys at the offer price and sells at the bid price. The offer price is higher than the bid price and this charge goes to...

Hi Matt Thanks for having a go at this with some numbers. Unfortunately your formula isn't quite right - you have the sign wrong outside the...

Hi Chapter 7 of the course notes describes how the methods work and gives some examples of the calculations used. Best wishes Mark

Hi Yash I'm sorry if my language wasn't clear. By losing I just mean the insurer is paying out more than they are getting in that year. Best...

Hi Yash The reserving calculations above are prospective calculations, so we are looking at cashflows in the future. Yes, there will have been a...

Hi Rashi There are a few acronyms in the SP2 Revision Books. Many of the CP1 acronyms could also be helpful for SP2. However, these acronyms...

Hi Aaron A numerical example might help. Imagine a policy with a premium of 95 for the main benefit and 5 for the rider - if the rider turns out...

Hi James If more is paid out on death then the asset share will be charged more for the cost of life cover and so the asset share will be lower....

Hi Rashi Yes it's true that the retrospective reserve for an endowment grows over time as premiums are added and interest is earned. It's also...

Hi Mohammed On any given day there are three types of policyholder: policyholders buying units policyholders selling units policyholders holding...

Hi Jaya Yes, you're correct to say that reserves are basically the sum kept aside by an insurance company for a contract to meet expected future...

Hi Naman Yes, that is exactly right. Typically pricing assumptions have less prudence than reserving assumptions. Best wishes Mark

Hi I think you have answered your own question here. You've realised that your approach was too narrow and you should have covered a wide range...

Hi Josh If you order the SP2 CMP now then you will get the 2024 version of the course. Best wishes Mark

Hi Svensson I would agree with everything you have written above. Thanks for writing this out so clearly. Subject CM2 demonstrates that under...

Hi A final thought on this. What you are describing isn't an investment guarantee as covered by the SP2 Core Reading. SP2 mentions maturity...

Hi Thanks for the more detailed example. As this policy is with-profits, then the most likely way of dealing with this is through the asset...

Hi Chapter 23 introduces the two methods (option pricing and simulation) for costing investment guarantees such as a guaranteed minimum maturity...

Hi Thanks for having a go at suggesting a possible approach to valuing this guarantee. First of all it is important to note that when pricing a...

Hi Y Chen Yes, we will be projecting all the inflows and outgoes and discounting them back. We would normally discount back to the start of the...

Hi Y Chen Selective lapses increases the expected mortality claims, so we would use a higher mortality assumption and have bigger per policy...

Hi Y Chen Yes, if the contract is profitable and we sum up all the cashflows from all the years on new business, allowing for investment return,...

Hello Thank you for your question. Cost of capital is a difficult area as there are many different ways to look at as you've noted above. First...

Hi If you are sensitivity testing the current reserves due to change in the reserving basis, then the contracts have already been sold and the...

Hi Y Chen To help you visualise how these two values change over time we have graphed their development. Have a look at Chapter 21 Section 5.2....

Hi Joshua I'm pleased to say that the 2024 CMP is available for purchase now. The 2024 materials have been available from our store since last...

Hi Joshua I'm pleased to say that the 2024 CMP is available for purchase now. The 2024 materials have been available from our store since last...

Hi Mahima Here's an example. Consider a four year unit-linked contract with initial expenses of 5 and initial charges of 2. This gives a loss of...

Hi I agree that the examiners report isn't very clear here. PMI could use quota share on original terms. If it did, then the percentage retained...

Hi Mahima In force business is any policy that has been sold and has not expired yet. So business becomes in force on the very first day. We...

Hi Mahima The expenses are uneven because there will be very large initial expenses followed by much lower regular expenses. So yes, there is...

Hi The mortality risk is made up of two parts: the number of people that take up the option and the average mortality of the people that take up...

Hi Mahima If a policy withdraws then we don't need to hold a reserve for it anymore. So the total reserves decrease (assuming that the reserves...

Hi Mahima I think you are thinking about setting up a prudent reserve now. Then yes setting up a prudent reserve leads to a loss now. However,...

Hi Mahima We are thinking of the impact of writing a new policy today. So these policies are now in force. Best wishes Mark

Hi Mahima Reserves are only calculated for contracts that have already been sold. So the initial expenses are in the past and so will not be part...

Hi The purpose of critical illness insurance is to provide a large lump sum to meet the costs arising from very serious illness. If the illness...

Hi Matt Thanks, I understand now. So yes, if the investment performance is terrible then we have the situation where the asset share cannot...

Hi Matt The idea behind climate liability risk is that the costs come about as a result of a legal challenge. This feels much more likely in a...

Yes, your summary of how the contract works above is spot on. :)

Sorry Matt, I'm confused. Where did you get the first bullet from?

Hi Yes, we can calculate reserves using the formula method or the cashflow method. Q1. Yes, reserves can be market-consistent or prudent. It...

Hi Mahima A quotation system is a system that produces quotes. So a prospective policyholder may ask for a quote of their likely premium. Many...

Hi Matt The question says: "Each year, there is a one-off bonus paid at rate B(t). This does not form a guaranteed addition to the benefits...

Hi Mahima 1. Yes, over the long term equities tend to provide a higher return than inflation. The return on equities tends to be higher when...

Hi Mahima There are no changes to the syllabus or Core Reading for the 2023 exams. We make improvements to our materials each year. If you would...

Hi If we use an equation of value (PV(Premiums) = PV(Benefits) + PV(Expenses)) to calculate premiums then we ignore the cost of capital. So we...

Hi Eleanor The above all looks correct with one small adjustment. The value of the premiums is not the same in the two equations. The premiums...

Yes this is right.:)

Hi Mahima A numerical example may help. Consider an insurer with a liability to pay in 2 years of 121. They have assets of 100. So if they...

Hi 1) If we want to use CAPM then we can set RDR = r + (E_M - r) Beta_i by estimating the historical beta of the insurer's shares. If we think...

Hi Kimiko No, I'm afraid this isn't right. I think you have it the wrong way round. If we were holding prudent reserves we would hold 2. If we...

Hi Mahima It's the same idea as your post above. The benefits are based on the unit fund, so their value is based on the assets that underlie...

Hi Mahima The benefits may be based on the value of a unit-linked fund. So the assets should be held in the same unit-linked fund. Best wishes Mark

Hi Mahima Mismatching occurs when the assets don't match the nature, term and currency of the liabilities. So for example, the insurer would be...

Hi Reserving requirements vary throughout the world. Some jurisdictions have gone for an all or nothing approach to the withdrawal assumption - it...

You are right that the unit fund will decrease and so the sum at risk (SA - unit fund) will increase. We are thinking here that the SA is bigger...

No, that's it. You have all the key points there. Just remember to break the question down into its components - in this case the asset and...

The above is all exactly right. So you really do understand it. :)

Hi Kimiko Have a go at explaining this yourself. What do you think will happen to the liabilities? What do you think will happen to the assets?

1. If premium rates are going to be used fore the next four years, then on average they will be used at time two and so if the expenses include...

The insurer is receiving income from the assets but paying out no benefits in the deferred period. So there will be reinvestment risk for the insurer.

The longer the term of the cashflow the bigger the impact of a change in interest rates. Higher interest rates lead to lower values.

The balance sheet should balance, ie assets should equal liabilities. The shareholders own everything that is left after paying the policyholders,...

More underwriting should mean less ant-selection, so lower price. This might outweigh the extra hassle from the policyholder's view.

Discounting P1 would ignore the impact of anti-selection amongst the option takers. So to value the option we must equate the value of all the...

Hi Whether lapses are good or bad very more depends on the context. Please could you let me know where you have seen this statement. Yes, I'd...

Hi Assuming a low rate of lapses and a high mortality rate will be more prudent than assuming a high rate of lapses and the same high mortality...

Yes :)

Increased interest rates will mean less consumer spending which may cause a recession.

Hi Kimiko Yes, it's the 2022 tables. This formula is on page 36 of the tables. Best wishes Mark

Hi Kimiko Embedded values are designed to place a value on the company for shareholders. So they should only include the shareholders' share of...

Hi Kimiko The exam may require you to use the values given in the yellow tables. Soi you should make sure that you have a copy of these for the...

Hi Kimiko A numerical example might help. In some countries, negative non-unit reserves are not allowed. It is important to work backwards when...

Hi Having more detailed questions might remove the need for doctor's reports or supplementary questions at a later stage and so improve...

Hi Kimiko Term assurances have small premiums as there is no maturity benefit. So it is more likely that the initial expenses will exceed the...

Hi Kimiko A positive non-unit reserve is only required when the expected present value of the future expenses and other costs exceed the charges....

Hi Kimiko No, that isn't right. If the company has very little available capital then it can't afford to invest in risky assets as the probability...

Hi Kimiko This contract guarantees the charges and recovers the initial expenses from charges later in the term of the contract. Both of these...

Hi Matt Yes, it's because that calculation would be backwards looking whereas the volatility baked into option prices is forwards looking and...

Hi Kimiko These contracts can be very flexible. The policyholder chooses the premiums. The insurer set the charges. Best wishes Mark

Hi Kimiko This is quite a common feature for unit-linked whole life contracts. As the person gets older the mortality charges will increase....

Hi In this question, people can get a home test kit that can diagnose Alzheimer's disease. This could be helpful for people to determine whether...

Hi Kimiko No, the index for US shares will be measured in dollars as this is the currency used in the USA (eg the Dow Jones index). Best wishes...

Hi Kimiko These points are different. The first point says the fund will be bigger if the premium is bigger. The second point says the fund will...

Hi Kimiko We are saying that the revalorisation method can give smooth results (eg because it uses book values) without the need for the actuary...

Hi Y Chen The asset share is the money the insurer has accumulated on the contract allowing for all cashflows. So if it pays out more than asset...

Hi Y Chen Ignoring expenses, reserves are the present value of the benefits less premiums. So if the insurer has made a surplus and can afford to...

Hi Y Chen Thank you for the chapter reference. The F102 course is a little different to the SP2 course. Yes, we are just trying to make sure...

Hi Kimiko Yes that's right. Larger policies contribute larger profits if the expense loading is calculated as a proportion of the premium. Best...

Hi By matched asset share we just mean that the asset share is invested in assets that match the liabilities. A higher interest rate means that...

Hi Kimiko We made a conscious effort to thin down the course materials to focus on the key areas. You will find this throughout the course when...

Hi Selection involves actions taken by policyholders that would benefit them at the expense of the insurer. Most commonly we see mortality...

Hi Mahima Hi Mahima One reason might be the desire to keep the reserving process as simple as possible. The notes do say that financial...

Hi Y Chen Please can you give me a reference for this question. Where did you see it, eg chapter number and page number? Best wishes Mark

Hi Kimiko In your first two paragraphs you are looking at the case where we assume 100% take up of the option assuming ultimate mortality. The...