How will the modelling choose model points that represent the existing business for unit-linked contracts? I guess certain ages, premiums, charges etc. Please advise.
The solution says: 1) In the early years premiums are higher than the cost of life cover. Part of the excess is used to build up a reserve for later years of the policy when the cost of cover exceeds the level premium. On surrender there will therefore be a release of reserves. Please explain. 2) If mortality experience has improved since the policies were priced, then it may be possible to increase surrender value whilst maintaining profits at the original targeted level. Please explain.
Question 5 The solution says: 1) Solvency requirement: "Investments would follow overall asset split for liabilities". Are they saying the solvency requirement amount will be split in the same split as the assets? 2) General Points: "Need to consider tax position of the company and any tax implications of investing in certain asset classes" Does the tax on certain investments determined in absolute terms or based on the investor's salary tax rate? Question 5(iii) The solution says: i) "Cash investment of 10% may be too much". How is this determined as being too much? ii) The company has a high level of investment in direct property- for a relatively small fund may want to consider investing indirectly in property (e.g. investment trusts) to achieve exposure? How is this determined as being too much? iii) 25% of equities are overseas. Appropriate to hold some overseas equities for diversification of risk but need to consider whether currency risk is reasonable in the context of level of free assets. Does this mean if level of free assets are low, the company should avoid taking too much risk?
The solution says: a) The company might decide to introduce differential annuity rates to allow for the expected mortality of lives e.g. in different states of health, different regions, different socio-economic group. They could then manage this risk using underwriting. How would underwriting be done? b) The company could consider using mortality derivatives to reduce the risk of future mortality improvements? Please provide examples of mortality derivatives. c) Volumes sold being lower than expected, leading to a lower contribution to overheads and other fixed expenses. How will this work? Will more capital be required to cover a large portion of the fixed expenses?
1) https://www.acted.co.uk/forums/index.php?threads/why-a-surrender-value-might-be-offered.12284/ 2) If mortality experience was higher than assumed in pricing, then the company is making more profits than it originally expected. It can therefore use these profits to increase surrender value so that it ends up with its original expected profit.
1. Yes they are. Though they also suggest you might opt for a bit less risk than that. 2. It's referring to the tax position of the company (which differ for different policy types). Tax might affect different asset classes in different ways. I) feels like a lot of a long term life insurer. you wouldn't expect to have to pay out 10% of your assets too quickly, except in exceptional situations. ii) a bit subjective but learn from questions like this. You can't buy many properties for £1m. iii). Yes
