• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Ch 21

Actuary@22

Very Active Member
Hi
I have a few doubts in this chapter:

1.Pls explain situation 5 of early int rate change for Single premium policy.I didn't understand what the reading is trying to convey through this situation.

Section 5.4

2.Why is Investment assumption not included in this section and under prospective value would this assumption be prudent/best estimate?

3.Please explain why mortality assumption will not have much effect on the surrender values in case of most assurance contracts as per the paragraph on pg 19 in this section.
 
Hi
I have a few doubts in this chapter:

1.Pls explain situation 5 of early int rate change for Single premium policy.I didn't understand what the reading is trying to convey through this situation.

Section 5.4

2.Why is Investment assumption not included in this section and under prospective value would this assumption be prudent/best estimate?

3.Please explain why mortality assumption will not have much effect on the surrender values in case of most assurance contracts as per the paragraph on pg 19 in this section.
1. If interest rates change then the value of the assets and the liabilities will change. If one changes more than the other, then the amount of profit made will also change. It is difficult to match a regular premium contract early on (eg there is reinvestment risk), so a change in profit is inevitable. But situation 5 is saying that as single premium policies can be matched even early in the term, then profit won't be changed.

2. The investment return is covered - the first heading is interest. The choice of basis will determine how much profit will be made - Section 5.2 discusses the different possibilities.

3. The policyholder is far more likely to receive a claim on maturity than death for an endowment assurance. The policyholder wouldn't surrender if they thought there was a high chance of claiming on the life cover. So the mortality assumption will be low.

Best wishes

Mark
 
A
1. If interest rates change then the value of the assets and the liabilities will change. If one changes more than the other, then the amount of profit made will also change. It is difficult to match a regular premium contract early on (eg there is reinvestment risk), so a change in profit is inevitable. But situation 5 is saying that as single premium policies can be matched even early in the term, then profit won't be changed.

2. The investment return is covered - the first heading is interest. The choice of basis will determine how much profit will be made - Section 5.2 discusses the different possibilities.

3. The policyholder is far more likely to receive a claim on maturity than death for an endowment assurance. The policyholder wouldn't surrender if they thought there was a high chance of claiming on the life cover. So the mortality assumption will be low.

Best wishes

Mark[/QUOTE
Hi Mark

could you please explain “It is difficult to match a regular premium contract early on (eg there is reinvestment risk), so a change in profit is inevitable.” In point 1 above

and also “The policyholder wouldn't surrender if they thought there was a high chance of claiming on the life cover. So the mortality assumption will be low.”


Thanks!
 
Hi Priyanka

It might be quite easy to match a single premium contract. All the assets are available at the start of the contract and can be chosen to match the expected payouts.

It is much harder to match a regular premium contract. The initial assets are just the first premium (less expenses). So the insurer is relying on future premiums to cover most of the future payouts. But the insurer doesn't know what interest rates will be (and hence the price of assets) when these premiums are paid. This is what we mean by reinvestment risk. If interest rates go down, asset prices go up, and so the future premiums might not be enough to buy assets that would match the payouts.

Policyholders will consider their health when deciding whether to surrender a contract with a death benefit. If their health is poor, so that they have a relatively high chance of death, then they are unlikely to surrender as they want to keep the life cover. Therefore the mortality assumption for surrenders is likely to be quite low as only the healthy will surrender.

Best wishes

Mark
 
Back
Top