Revision questions- past year papers

Discussion in 'SP2' started by 1495_sc, Aug 22, 2021.

  1. 1495_sc

    1495_sc Ton up Member

    Hello,

    While solving April 2018's question paper, I had following questions. Can someone please help?

    1. Q3

    i)- For negative non unit reserve, how will an exit 'reduce' asset and 'increase' liability? How is this justified considering (PV of expenses-PV of charges) for non-unit reserve calculation?
    ii)- Assumptions don't appear to reflect trend in data. In particular, assumption for B doesn't appear to be prudent when looking at the most recent date.

    I didn't understand these comments.

    2. Q4

    ii) 'Impose a maximum new business target' for managing risk from option offered by insurance company. Is this a practical solution? Do insurers ever limit the new business from a certain offering (and decline policyholders after that or remove the option's availability)

    3. Q7

    i) Assessing principles for setting surrender values against the approach for transfer values-

    Treating surrendering and continuing policyholders equitably.

    How does using best estimate assumption ensure this?

    Relevant part of Core Reading below-

    If these surrender value assumptions exactly represent future experience, then the total profit retained will be the same as if the contract had not been surrendered. If they are the same as the premium basis assumptions, then the company only retains the profit it has made to date.

    (EAS – SV' ) + (SV' – SV'')


    ii) Why will pricing model be run when we only need the assumptions from pricing model, not the output?

    Why are we considering possibility of a full run of valuation model if there is an individual request? Modelling platforms always allow running a single policy in contrast with full model.

    iii) Even if the record does indicate marital status, there may not be any specific details of the existing spouse held.

    If we buy a joint life policy, the joint life's birthday and relationship with primary policyholder are captured. Hence, we know their age and gender. If marital status is known, wouldn't these details also be captured?

    Thank you in advance!
     
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hello

    I've answered each question in turn below.

    1. Q3(i) We are told that type B contracts have negative non-unit reserves. This is because the present value of future charges exceeds the present value of the future expenses. We can either consider these future profits as an asset or as a negative liability. So if the contract surrenders, this asset goes down, or equivalently the liability goes up (from minus 10 to zero say).

    1. Q3(ii) For type B contracts a prudent assumption would be high withdrawal rates. The data shows an increasing trend of withdrawals, increasing at almost 1% per year, so a best estimate might be 9% or 10%. To be prudent we'd want something higher than the suggested 9%.

    2. Q4 Yes, insurers really do impose a cap on sales numbers. I've seen contracts with guarantees being launched which explicitly say that only 10,000 policies would be sold.

    3. Q7(i) By using best estimate assumptions we are neither overvaluing the contract or undervaluing it, so in that sense we are being fair as surrendering and continuing policyholders will have benefits that are worth the same.

    3. Q7(ii) The question says that the transfer values will be calculated using the liability valuation model - this will be set up to value all policies on the valuation basis (which may be a prudent basis). But we want individual values calculated using best estimates (which may well be the pricing basis). As you say, it might be ok to make these two changes, but we'll get more marks by flagging these as issues to consider, rather than assuming that everything will be ok.

    3. Q7(iii) Notice that these are not individual policies where the insurer would of course have captured all the data regarding the policyholders. Instead the insurer has taken over the liabilities of an employer's group scheme where it is very unlikely that the employer will know details of spouses.

    Best wishes

    Mark
     
  3. 1495_sc

    1495_sc Ton up Member

    This trend is somewhat inconsistent because it increases @1% from 2007-2012 but decreases to 6% in 2013 followed by which the assumption in 7%,9% and 8%. How can we still say that there was an increasing trend throughout and 9% is not reasonable for type B?
     
  4. 1495_sc

    1495_sc Ton up Member

    Alright. Is this the same as Core Reading material- If these surrender value assumptions exactly represent future experience, then the total profit retained will be the same as if the contract had not been surrendered ?

     
  5. 1495_sc

    1495_sc Ton up Member

    Thanks a lot for clarifying my doubts again, Mark!
     
  6. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    It would be very surprising to see a trend that went upwards in every single year. But we can see that the overall trend is very clearly upwards. There are falls in some years, but these are followed by bigger rises in the following years. Plus, we want a bigger rate to be prudent. So overall, I think it's pretty safe to say that the assumption is too low.

    Best wishes

    Mark
     
  7. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    I don't think this is the bit of Core Reading to consider here. We're not looking at the profit to the insurer. Instead we're trying to be fair between the two groups of policyholders. This is important here as it is an employer group scheme.

    Best wishes

    Mark
     
  8. 1495_sc

    1495_sc Ton up Member

    Ok. Thank you!
     
  9. 1495_sc

    1495_sc Ton up Member

    Ok. If we were required to look at the profit aspect, what would it mean?
     
  10. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Using a best estimate basis gives a lower surrender value than using a slightly prudent (pricing) basis. So using best estimate assumptions gives the insurer more profit, in fact they get the same profit as if the contract had run to maturity.

    Best wishes

    Mark
     
  11. 1495_sc

    1495_sc Ton up Member

    Thank you for clarifying!
     

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