CMP Chapters 23 & 24

Discussion in 'SP2' started by shinmo, Mar 6, 2015.

  1. shinmo

    shinmo Member

    Chapter 23, Page 5
    Question 23.4 (iv) mentions “endowment assurance term reduced to 2 years, 15 years in out of 35”.

    What does the phrase “15 years in out of 35” mean?


    Chapter 23, Page 8
    “At medium durations, paid-up values tend to be too low, because no allowance is made for investment earnings”
    1. Why is no allowance made for investment earnings at medium durations?
    2. How does allowance for investment earnings affect paid up values?


    Chapter 23, Page 10 Example
    In the solution, why does the equation of value not take account of claim expenses, f ?

    Question 23.16
    Solution states “problem of excessive profits is with low paid-up values”.
    1. Why so?
    2. Why is paid up value low under this method, paid up policy value plus premium for balance of SA?


    Chapter 24, Page 1
    Notes specify that investment guarantees are stated as a guaranteed monetary value.
    Can investment guarantees be stated as a guaranteed investment return?


    Question 24.1
    1. What is open market cash option?
    2. “If insurer invests to pay annuity, risk is that interest rates are high and the annuity offered by the insurer is worth less than the cash alternative”.
    Since the insurer invests to pay the annuity’s liabilities, its liabilities are matched by assets, right?
    So, there is no longer interest rate risk, right?
    Perhaps a possible risk is that the annuity offers poorer return to policyholder than cash, hence policyholder may be dissatisfied, leading to marketing risk and surrender risk?
    Is my understanding correct?

    Thanks in advance. Any help is much appreciated!!!
     
    Last edited by a moderator: Mar 6, 2015
    shinmo, Mar 6, 2015
    #1
  2. shinmo

    shinmo Member

    Sos

    Hi, would really appreciate a reply please. Thanks very much for your help in advance!
     
    shinmo, Mar 15, 2015
    #2
  3. Darrell Chainey

    Darrell Chainey ActEd Tutor Staff Member

    1. The original term was 35 years. They're requesting the change after 15 years from the start.

    2. The proportionate paid up method doesn't allow for investment return at any durations. It's just multiplying the SA by a ratio of retums, not accumulating or discounting for investment return. The sentence underneath explains the next bit:

    Early premiums buy a larger proportion of the sum assured than later premiums,because of the time to maturity and the effect of compound interest. At most durations this means that a proportionate value understates the true value of the policy ...

    3. There weren't any claim expenses mentioned in the question can can assume there aren't any.

    4. I wouldn't worry too much about this but it's referring to the likely paid up value at early durations (not the alteration method). At early durations PUP values are likely to be low, in the same way surrender values might be low (asset shares are low).

    5. Guarantee: in theory I suppose so. Though more complex, harder to understand, need to be precise with definition, eg before or after charges etc.

    6. OMCO - it's implying the p/h would have the option of taking the guranteed annuity or a cash equivalent (PV of annuity payments) calculated on then market conditions. You don't know which option the p/h will choose, so there's a risk that you invest for one option and they take the other if markets are favourable to do so.
     
    Darrell Chainey, Mar 17, 2015
    #3

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