Hi, got a very last minute question and it seems very confusing to the use of ultimate (with []) and the select mortality in chapter 24 in the numerical examples on the pricing of mortality option. So do we use select mortality for all the new policies and ultimate when we are calculating the option? Also, what makes things worse is occasionally the question will say mortality of standard lives is select and mortality after taking up will become ultimate. My question is, say we are handling an increase in benefit option, do we assume that the client switch from select to ultimate on their original coverage?
If we are calculating the premium the policyholder pays after taking up the option, then this is calculated using select mortality. This is because the mortality option gives the policyholder the right to get a new policy on the same terms as someone that has just been underwritten. However, when we value the cost of the option, the probability that the policyholder receives the option benefits (and pays the option premium) will depend on the polciyholder's health at that time. The conventional method assumes ultimate mortality here. Good luck with the exam. Mark
Hello, thanks Mark for the answer. I still am feeling a bit unsure about this. Isn't the cost of the option = PV(Benefit) - PV (Prem) here? Are you implying that we use select for PV(Prem) and ultimate for PV(Benefit)? Will you be able to highlight also how this differs in the North American Method as I feel a bit uncomfortable on the notes...Thanks once again.
