Hi everyone and ActEd tutors, Please can you answer these questions as I'm unsure on them. Q1) What's the difference between a product's "Premium Assumptions" and "Premium Rate"? Is the premium rate the amount charged to a customer for a product (e.g. dependant on their age/gender/health) which has been priced using a set of pricing assumptions. Q2) Is "Market Consistent or Market Value" assumption one where the investment return and discount rate is the "Risk Free Rate + Risk Margin", where the risk margin could be the credit spread? Is "Risk Neutral" assumption one where the investment return and discount rate is the "Risk Free Rate" Only? For a Market Consistent Valuation, assets are taken to have investment return as "Risk Free Rate" regardless of asset mix. Why is this? Q3) For a With Profits Policy, is it correct to think of the policy's asset share are being kept in the company's reserves (this is the policy's total SA, which is basic SA + declared bonuses) and the company's free assets (this is the policy's asset share in the estate)? Q4) Please can you clarify what a "Policyholder's Expectations" (PRE) are and how they are found? And is the below true? E.g. A Surrender Value Method is going to change soon. As long as its communicated well before the change, are the PRE met? E.g. If a Surrender Value Method is very low, say 10% of asset share, and is explained clearly to a customer at point of sale. Are PRE met as they expect this to be the surrender value or is it not met as it doesn't comply with the industry or competition's surrender value for the same product? Big Thank You!!
Hi I'll take these questions one at a time. We multiply the sum assured by the premium rate to get the premium. So the sum assured might be 100,000, the premium rate may be 2 per thousand, and so the premium is 200. Yes, the premium assumptions will be a set of assumptions for mortality, interest etc based on age etc. Best wishes Mark
Hi A market value is an observable value taken from the market, eg the price of a share quoted on a stock exchange. A market-consistent value attempts to produce a value that is in line with observable prices. It would usually be calculated using the risk-free rate without a risk margin in the interest rate assumption. However, it might be argued that the illiquidity premium part of the credit spread is actually risk free if the insurer intends to hold the asset to maturity. A risk-neutral valuation can be thought of as just an alternative name for a market-consistent valuation. Subject CM2 covers risk-neutral (ie market-consistent) valuations in detail. It demonstrates that the correct way to calculate values consistent with the market (and hence avoid an arbitrage) is to use the risk-free rate, eg Black-Scholes, 5-step method, bo=inomial model. Best wishes Mark
Hi It depends what the reserving regulations say. The regulations might require that the reserve is bigger than the asset share, in which case all of the asset share sits within the reserves. But yes, if the reserve only covers the past bonuses then the reminder of the asset share might form part of the estate. Best wishes Mark
Hi PRE is what the actuary thinks policyholders will expect. We don't actually ask the policyholders what they expect. However, we base our belief on what the policyholder has been told, past practice of the insurer and what the competition does. Best wishes Mark
Hi It's hard to give a definitive answer here. PRE is very subjective. However, explaining things clearly and well in advance will certainly help. Best wishes Mark
