Hi, This is regarding question 2 in assignment X1 2019. it says "The company’s non-guaranteed rates mostly depend on yields on Ruritanian government stock and expected mortality rates at the date the annuity is purchased". Not sure what it means. Secondly, in a solution the first point is - There is a mortality risk because the death benefit will exceed the value of the unit fund for many(about ten?) years. We are assuming that since it is an endowment plan, there would be some sum assured guaranteed. right? Since there is nothing mentioned in the question with regard to the death benefit.
Hello Himanshu This question is about a pension savings contract. At retirement the policyholder can either buy an annuity at the current non-guaranteed rate or can buy the annuity at the rate guaranteed in the contract. The company calculates the premium for the non-guaranteed annuity by considering the yields on government bonds (to give the interest rate assumption) and the expected mortality rate - there will be other assumptions such as expenses, but these interest and mortality assumptions are the key ones. The question tells us that the contract is an endowment assurance, so there must be a death benefit as well as a maturity benefit. So the contract will pay the larger of the sum assured and the unit fund on death. Given the savings nature of the contract, it is unlikely that the sum assured is particularly high. But the contract is regular premium so it will take some years before the fund overtakes the sum assured. I hope these points help to clarify the question. Best wishes Mark
