Projected cost of guarantee - Chapt 16

Discussion in 'SP2' started by JamaicanJem, Feb 8, 2019.

  1. JamaicanJem

    JamaicanJem Ton up Member

    Hey All,

    I had two questions about the solution for 16.4.
    1) Why would cases that show a reduced NPV (with all the new cfs) be undercharging for the guarantee? I would think profitability would be decreased with the guarantee.
    2) Why is the projected cost of the guarantee a function of the fund size? Is it because the fund size will dictate the annuity amount based on the conversion factor, and the larger the annuity, maybe the larger the cost or providing it?

    Thanks.
     
  2. mugono

    mugono Ton up Member

    Hi JamaicanJem

    I’m surprised nobody has answered this. I don’t have the notes but will give it a go :).

    1. There (should) be a cost for providing a guarantee. The insurer can only be worse off for having provided the guarantee compared to not providing the guarantee at all. If the NPV that includes the guarantee lowers the NPV (compared to the ‘no guarantee’ NPV) then this would lower the profitability of the product. The guarantee charge would need to be increased to preserve profit margins.

    2. Sounds logical to me :)
     
    Last edited: Feb 9, 2019
  3. JamaicanJem

    JamaicanJem Ton up Member

    Thanks much!
     

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