ActuarialKropotkin
Member
In the Q&A Bank there is a question on how and where to incorporate margins against adverse contingencies in the case of reviewing premium rates for a twenty-year without-profits term assurance.
One of the points in the solution is, "Maybe also assume high lapses early on when the earned asset share is negative, and low lapses later on to guard against the effect of selective withdrawal (i.e. only the fit lapsing)."
I understand the first part of assuming high lapses. My question is, how and why does assuming low lapse rates later on guard against the effect of selective withdrawal? Selective withdrawals on term assurances can lead to worse mortality experience than assumed in the premium basis. What is the relevance of an assumption of low lapse rates as a margin against this?
Surely, if we assume the lowest of low lapse rate later on, i.e. a lapse rate of zero, then we assume no effect of lapses on our mortality, which, if there are selective withdrawals, would mean we have underestimated mortality? Please explain the flaw in my reasoning, as I am confused.
Thanks!
One of the points in the solution is, "Maybe also assume high lapses early on when the earned asset share is negative, and low lapses later on to guard against the effect of selective withdrawal (i.e. only the fit lapsing)."
I understand the first part of assuming high lapses. My question is, how and why does assuming low lapse rates later on guard against the effect of selective withdrawal? Selective withdrawals on term assurances can lead to worse mortality experience than assumed in the premium basis. What is the relevance of an assumption of low lapse rates as a margin against this?
Surely, if we assume the lowest of low lapse rate later on, i.e. a lapse rate of zero, then we assume no effect of lapses on our mortality, which, if there are selective withdrawals, would mean we have underestimated mortality? Please explain the flaw in my reasoning, as I am confused.
Thanks!