D
dChetty
Member
The solution says
If the guaranteed annuity options are "in the money" then there is a risk of lower withdrawals prior to exercise date than allowed for in the pricing. If there guaranteed annuity options are "out of the money" then there is a risk of higher than expected withdrawals prior to exercise. Why would there be withdrawals? If it's in the money then the policyholder is getting a higher rate than in the market so he/she will not withdraw, am I right?
Why is a call option used here?
The solution also says. The company would need to determine an estimate for the proportion of policyholders taking the option at each age in order to derive the appropriate mix of terms of option on which to base the pricing. Is this referring to the take up rates at each age to determine the expected life expectancy at that age?
If the guaranteed annuity options are "in the money" then there is a risk of lower withdrawals prior to exercise date than allowed for in the pricing. If there guaranteed annuity options are "out of the money" then there is a risk of higher than expected withdrawals prior to exercise. Why would there be withdrawals? If it's in the money then the policyholder is getting a higher rate than in the market so he/she will not withdraw, am I right?
Why is a call option used here?
The solution also says. The company would need to determine an estimate for the proportion of policyholders taking the option at each age in order to derive the appropriate mix of terms of option on which to base the pricing. Is this referring to the take up rates at each age to determine the expected life expectancy at that age?