Qs in SA 2

[justarrived]

Hi All - I was reading a life past paper - the subject F 1997 Paper 2. I have a couple doubts about the examiners solutions - Any help is greatly appreciated.
I dont understand the foll:
1) the solution # 2 says that longer term pension contracts imply a bigger guarantee than shorter term investment contracts

2) a lower bonus loading under conventional policies is likely to lead to higher overall guarantees.

Thanks in advance for replies.

 

[Mike Lewry]

Subject F, April 1997, Paper 2 Q2(i)

I dont understand the foll:
1) the solution # 2 says that longer term pension contracts imply a bigger guarantee than shorter term investment contracts

Hmmm - this isn't what my copy of the Examiners' Report says. I've got "Long-term pensions business, for example, is likely to carry lower implied guarantees than short term investment business" (emphasis mine)

This is just a design issue: with-profits pensions policyholders are likely to have a specific focus on achieving a good real return over a long period, which is best aimed for by having low guaranteed benefits, which give more investment freedom. On the other hand there isn't going to be much potential for a freer investment strategy to yield superior returns over a very short term, so short term with-profits investment business is less likely to be designed with low guaranteed benefits.

2) a lower bonus loading under conventional policies is likely to lead to higher overall guarantees.

Thanks in advance for replies.

The "bonus loading" is the level of bonus allowed for when setting the premium rates. So a low bonus loading will lead to a low premium for a specified sum assured, or equivalently, a high sum assured for a specified premium. Looking at it from the latter point of view, we can see that a low bonus loading means the guaranteed benefits start off at a high level (ie high initial sum assured) and they're likely to stay higher than those for an equivalent policy with a high bonus loading (unless much lower bonuses are subsequently declared).

Hope that helps