Ch 21

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

 

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