April 2012 Q1 ii)

[Komal Gupta]

Not able to understand the explanation of ii part.

 

[Mark Willder]

Not able to understand the explanation of ii part.

Hi Komal

Please can you give more detail so that I can help you. It would be useful to know what materials you are looking at, eg is it the examiners report or the ActEd revision books? This is quite a long question, what aspect of it were you struggling with?

Best wishes

Mark

 

[Komal Gupta]

Hi Mark,
I'm looking at ActEd Revision book.
1. " The option take-up rate will depend on the annuity received by the policyholder and not on the cost of providing the annuity to the insurer (which is unchanged by the ruling).

For example, men may exercise the guarantee if the guaranteed annuity is greater than the unisex annuity available in the market. But the guaranteed annuity will still be cheaper for the company to provide than the maturity payout if the guaranteed annuity would have been cheaper than the annuity that would have been quoted male mortality rates."

2. "However, if the guaranteed annuity rate for males lies between the open market unisex rates and the equivalent male rate, we would expect more men to take up the option after rule change."

I didn't understand these 2 paragraphs.

 

[Mark Willder]

Hi Mark,
I'm looking at ActEd Revision book.
1. " The option take-up rate will depend on the annuity received by the policyholder and not on the cost of providing the annuity to the insurer (which is unchanged by the ruling).

For example, men may exercise the guarantee if the guaranteed annuity is greater than the unisex annuity available in the market. But the guaranteed annuity will still be cheaper for the company to provide than the maturity payout if the guaranteed annuity would have been cheaper than the annuity that would have been quoted male mortality rates."

2. "However, if the guaranteed annuity rate for males lies between the open market unisex rates and the equivalent male rate, we would expect more men to take up the option after rule change."

I didn't understand these 2 paragraphs.

Hi Komal

A numerical example might help.

The solution tells us that before the ruling change, men would get a higher annuity amount than women for the same premium.

Let's assume that the product for men guarantees an income of 30, and the product for women guarantees 25.

After the ruling let's say that an insurer could afford to pay 32 to men and 27 to women. However the cost of providing this annuity is irrelevant to the policyholder as they will make their choice based on the benefit they will actually receive. The gender ruling means than men and women should receive the same benefit - let's say this is 29 (I've weighted the male and female rates slightly in favour of women as more women will buy unisex rate annuity policies as they are a better deal for them).

So men will exercise the option and receive the guaranteed 30 rather than the current unisex market rate of 29. But the guaranteed annuity rate is still cheaper for the company as it can afford to pay men 32 for that premium. This explains your point 1.

In point 2. it says that the guaranteed annuity rate for males (30) lies between the open market unisex rates (29) and the equivalent male rate (32), we would expect more men to take up the option after rule change (as they get 30 rather than 29 after the rule change, whereas before the rule change they wouldn't have exercised the option as they would prefer 32 over the guaranteed 30).

Best wishes

Mark