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