April 2007 Exam Paper Q3 (ii) This questions asks how the expenses analysis would be carried out. The ASET solutions mentions on page 10 mentions that after the expenses have been apportioned into initial, claim and termination expenses, these can be further split according to whether the expense is proportional to: 1) the number of policies 2) the size of premium 3) the size of sum assured However on page 11, I don't understand why the expenses resullts would only be translated into per-policy assumptions. Should't some of the expenses be translated as a percentage of premium or claim since page 10 mentions that that some of the expenses could be proprtional to the size of premium or the size of sum assured. April 2006 Exam Paper Q2 (i) I dont understand some of the paragraohs of the ASET solutions given on page 5 "Policy reserves will increase with duration, because the past level premiums will amount to more than the cost of claims and expenses incurred to date (except at early durations), and because the furture cost of claims and expenses amounts to more than the value of the future premium" I understand the past level premium being greater than the cost of claim and expenses and future cost of claims and expenses being greater than the value of future premiums. I dont understand how this ties in with the policy reserves increasing with duration. "The company should therefore be able to pay some kind of reserve on surrender without altering its overall profitability" Can you please explain this? "Failure to pay a surrender value could lead to justified complaints about the company............" Can you explain this sentance? April 2006 Exam Paper Q2 (ii) Dont understand the paragraph given on page 6 of ASET solution "It would be hoped that the insurer would also spend less time dealing with complaints and so reduce its cost" Can you please explain this? Can you give an example of a lapse and re-entry and how this can be a risk for increasing surrender values?
You're absolutely right - some of the expenses should be %P or %Sum Assured Later in the policy, the future premiums to be paid are more likely to not cover the cost of future claims and expenses, so later prospective reserves will be higher. Note that it's actually more common to look at this affordabiltiy question retrospectively, and so to talk about asset shares - which the solution also does. The company's profits will come from the excess of the amount it has built up over the benefit it pays to the policyholder. It would normally make its profit on death on a whole life policy, but could make it's profit at surrender instead, provided the surrender value is less than the reserve. If you'd indicated at the time you sold the policy that some level of surrender value would be paid if the customer surrendered, then the customer would have a reasonable complaint if they actualy went on to surrender and you didn't pay any SV. The more generous the SVs paid, the fewer customers are likely to complain. So insurer spends less time and money dealing with complaints. If you offer over-generous SV, there's a possible lapse and re-entry risk, eg if a policyholder could use the SV as a single premium towards buying a new policy and pay the balance of the cost of the new policy by regular premiums. IF these "new policy regular premiums" are lower than the "current policy regular premiums", there's a lapse and re-entry risk. Lynn
