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ASET April 2014 (v)

T

TanishaS

Active Member
We are asked to consider why the company does not consider the onerous policyholder behaviour (which is taking up the annuity at the guaranteed rates).
Can you please help if these points make sense:
1) The size of the personal pension business is very small and thus the guarantees biting would not impact the capital required.
2) Any guarantee biting does not lead to a material impact on the profit.
3) The company has a low longevity risk and does not consider the onerous option to be costly.
4) The assets backing the liabilities are providing a good return. The company has a high free surplus to deal with the guarantees.

Thanks
 
We need to put this into the precise context of the exam question. The company is calculating its Solvency II BEL and needs to make an assumption about the proportion of p/hs taking up the guaranteed annuity option (GAO). Specifically, it is asking why it would not assume that 100% of p/hs would take up the GAO when it is biting or 'in-the-money' (and therefore onerous for the company).

Because it is calculating the BEL, the take-up rate assumption needs to be best estimate. On a best estimate (or realistic) basis, the company would not expect all p/hs to take up the GAO when it is biting. There are various reasons why some p/hs might not take it up, as are covered in the solution to this question. This is what is being asked for.

Your points don't seem to address the specific question being asked, which is not about why the cost of guarantees might be ignored or why the company might not be concerned about it; it is about setting a best estimate take-up rate assumption. [Your third point is about risk: remember that that is reflected in the RM and SCR, not the BEL.]
 
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