Regarding the mortality risk of with profit endowment assurance policies policies.. The insurer will deduct mortality charges from the asset share of each policy to pay for the mortality risk that the policy represents. Apart from early deaths, the risks to the insurer are: (a) at a portfolio level, that there are generally more deaths than expected such that the mortality charges taken in aggregate are insufficient to meet the death benefits paid out in excess of asset shares. (b) that policyholders generally die earlier than expected, meaning that, under the waiver of premium benefit, the premiums are paid by the insurance company for a longer period than expected i.e. the company has underestimated the cost of providing the waiver of premium benefit. The mortality charge is deducted from the asset share of a with profits policy based on the number of actual deaths (probably,smoothed). How can it be insufficient? In Unit Linked, the charges are prefixed and hence I understand could be insufficient Also, I came across this bifurcation of "generally more deaths " and "earlier than expected deaths". How are they different from each other? If 12 policyholders die and 10 were expected to die, I can state it either ways, because 2 people died earlier than expected. Could you please explain?
Hello Good question - pretty subtle points I think! I think the reason is hinted at in your "probably smoothed" observation. This smoothing of the death costs is unlikely to be perfect in practice. For example, the mortality charges depend on both the number of deaths and the cost of each one (the excess of the death benefit over the asset share at death). It's tricky to get smoothed mortality rates that tie up exactly with an appropriate cost of each death. I like your explanation of the issue - I agree that both of your statements sound like the same thing! There may be a tendency to refer to "earlier deaths" when the cost to the company of the extra deaths is greater the earlier the deaths happen. So, in this particular question, because the waiver of premium benefit costs more the greater the number of outstanding premiums, particular mention is made of the "early" nature of the deaths. Best wishes Lynn
