Chapter 26

[kimiko]

Hi, in the solution on page 6, I don’t understand the reason why underwriting is “important if regular premium, not very important if single premium” for endowment and not the same for whole life. Shouldn’t the answer be the same for both? Can you kindly help me with understanding this table?

 

[Mark Willder]

Hi, in the solution on page 6, I don’t understand the reason why underwriting is “important if regular premium, not very important if single premium” for endowment and not the same for whole life. Shouldn’t the answer be the same for both? Can you kindly help me with understanding this table?

Hi kimiko

The solution makes no comment about the premiums for whole life policies, but it is always true that mortality risk is greater for regular premium than single premium policies as the sum at risk is larger for regular premiums.

However, a single premium endowment assurance has a lot less mortality risk than a whole life policy. Consider a 30 year old buying a 25 year policy. There is a very high probability that they will reach maturity, so there is little variation in the timing of the claim payout. But it matters a lot to the insurer whether the whole life policyholder dies at 70 or 95, so there is a lot of variation here - hence the need for underwriting.

Best wishes

Mark

 

[kimiko]

On page 6, why is underwriting irrelevant for pure endowment? I understand that mortality risk is not an issue but longevity risk is right? So shouldn't it be included with annuity in the section below "In theory, for annuity business a company should want to underwrite against good lives just as it would underwrite against bad lives for term assurance. For practical reasons it would not normally do this."? Not sure if my understanding is correct on this.

 

[Mark Willder]

On page 6, why is underwriting irrelevant for pure endowment? I understand that mortality risk is not an issue but longevity risk is right? So shouldn't it be included with annuity in the section below "In theory, for annuity business a company should want to underwrite against good lives just as it would underwrite against bad lives for term assurance. For practical reasons it would not normally do this."? Not sure if my understanding is correct on this.

Hi Kimiko

There would be little point underwriting a pure endowment. People will only buy them if they think they are in good health. So a very high proportion of policyholders will get their benefit at the end of the term.

The term of an annuity is much more variable, so there is potentially more need for underwriting. Unlike an endowment that has a fixed term, the annuity continues for life, which could be 25, 30 or more years.

Best wishes

Mark

 

[kimiko]

Hi Mark, in the solution to Practice Question 26.8, it says this: "Depending on the level of underwriting currently employed, it might even be beneficial for the term assurance business if the underwriting criteria were made more stringent, provided this can be accompanied by a significant reduction in price, thereby making the product more price competitive and hence more marketable that way. This may be a more significant effect than the increased underwriting hassle incurred." However, I don't understand how more stringent underwriting criteria could lead to a significant reduction in price and isn't this part of the "underwriting hassle" they mentioned as well?

 

[Mark Willder]

Hi Mark, in the solution to Practice Question 26.8, it says this: "Depending on the level of underwriting currently employed, it might even be beneficial for the term assurance business if the underwriting criteria were made more stringent, provided this can be accompanied by a significant reduction in price, thereby making the product more price competitive and hence more marketable that way. This may be a more significant effect than the increased underwriting hassle incurred." However, I don't understand how more stringent underwriting criteria could lead to a significant reduction in price and isn't this part of the "underwriting hassle" they mentioned as well?

More underwriting should mean less ant-selection, so lower price. This might outweigh the extra hassle from the policyholder's view.