Hi all, in the solutions to this question, the survival cost is 60,000.57 instead of simply the sum assured 60,000 - please can someone explain why this is? Thanks Molly
On the topic of profit testing, also in april 2014 Q 12, why do we not apply interest to renewal expenses? and is this the case for all annuity type profit test q's? Thanks
Hi Molly, Sept 12 Q 14 If a policyholder starting the 4th year dies in the 4th year they'll get a death benefit paid immediately - the cost of 38.73 and has been calculated assuming people die, on average, halfway through the year. If a policyholder starting the 4th year survives to the end of the year then they'll get the survival benefit paid at the end of the year - cost of 59,961.84. Every policyholder starting year 4 will receive a payout of 60,000 in year 4 - most will receive it at the end of the year (most will survive) but a few will receive it on earlier death. The total (death+survival) cost as at the end of the year is therefore slightly more than 60,000 reflecting the fact that some payouts had to be made earlier in the year. Apr 14 Q 12 The profit vector is the expected profit as at the end of the year (per policy in force at start of year) Therefore, cashflows like the premium and initial expense in year 1 which occur at the start of the year will earn 1 year's interest. The question tells you that the renewal expenses occur at the same time as the annuity payments (which are in arrears). Therefore no interest is applied because the renewal expense cashflows is already at the end of each year. The renewal expenses have also been multiplied by a survival probability because they will only be made if policyholder survives to the end of the year. This won't be the case for all annuity profit testing questions - it will depend on the timing of the cashflows. Thanks
Hi Michael, Ah thank you so much for explaining, thats a relief to know where i was going wrong. Thank you! Molly
