Hi, I was hoping someone could shed some light on an issue I have regarding mortality options. I have searched the acted forums and though questions have been asked before regarding this issue I still can't seem to grasp the concept. For the North American method, if the average mortality of non-option takers and option takers after the option is ultimate we can take a shortcut and only consider the value of option itself. (For example April 2010, question 6). Firstly, is my understanding of this correct? If so, what I don't understand is why we can do this? Why can't we use the full method? I tried using the full method for the past paper question and got a different answer. What does the difference in the cost from doing it the full way or the shortcut represent? Thanks!
I was also wondering the same thing. I tried April 2010 Q6 by looking at all of the benefits and premiums (not just those associated with the option) and get a different answer to the solution. But this method works for April 2005 Q3. Sorry I can't help, but it's good to know someone else has the same issue!
A2010 Q6 First thing to say is that you can do it the "long way" using the full method as you put it. You can still get full marks and so I wouldn't worry too much. The examiners say this at the end in italics and give an alternative answer. But you could have ignored the initial contract here because the assumptions we used to price, stay true throughout (ie that the whole group average out to ultimate mortality after the select period). And so the value of premiums and benefits of original contract should cancel out to zero - since this is what we would have done when pricing. I don't think we get exactly the same answer because the assumptions we make to work out the proportion taking the option don't actually end up with mortality averaging out. It might do for age 65, but it won't for other ages. We've simplified things a bit.
