April 2011 Question 1 2 3

The solution says the following:
a)Restrictions may change the cross-subsidies between groups of policyholders which could impact the design of the product. How does this affect design?

b) If there are restrictions on the investments then this may influence the company to offer products with fewer investment guarantees such as guaranteed maturity values. How does this affect design?

c) In addition a restriction on investments may create issues with UL funds that can be offered. How does this affect design?

 

The solution says "Whilst NB expenses may fall, it may be that they do not fall immediately or they may not fall proportionately in line with the fall in NB volumes". Is this because total salaries of staff may not change by much?

 

The solution says:


a)Assuming the defaults reflects the best estimate, and then the new annuities will benefit from not having this prudence built into the premium basis. Please explain.

b) On the other hand, if defaults are worse than expected this will mean the new annuity will be lower than that for the existing product in respect of this assumption. Please explain

 

The solution says:


Profit criteria

a) The NPV of the new annuity is 2% of the premium since all future expected surpluses go to enhance pay-outs. Please explain.

b) On the NPV approach, the old product is likely to produce a higher value for the same given premium, but this depends on the risk discount rate assumed. Please explain.

c) The riskiness of the new annuity cannot be measured by using a risk discount rate since future cash flows on a best estimate basis are 0. Why are future cash flows 0 if annuity payments are being made?

d) The IRR for the new annuity is meaningless as under these projections there would be a positive cash flow at outset and 0 thereafter. Please explain.

e) The new product will have a DPP of 0. Why?

f) The company therefore has to consider the fact that the NPV may be higher for the existing product, but it has more risk attached as the guarantees are higher. The existing product has a longer DPP. Please explain.

 

Sounds good

 

Everything in the t&c's of the policy is part of the product design. Price, term, charges, fund choices, guarantees etc etc

 

It's just saying if experience is better than original pricing basis then you will gain.

 

A. NPV =PV of profits. only profit is 2% at time o
B. all npv depend on rdr, which might differ
C. Cash flow to company, not p/h
D. Revise CT1
E. there's no capital strain at time 0
F just a summary of earlier answer

 

Thanks.

 

Thank you.

 

Thanks.

 

I am sorry, I don't follow. Please explain using a numerical example if possible.
Thanks.