I found the paper difficult as well - I personally didn't do as well as I might've hoped. It wasn't the hardest CT5/105 paper (think: Sept 2003), but there seems to have been more straight forward papers in recent memory. Unfortunately, I suspect the examiners will think that it was relatively straightforward. Also did I skip a question, or was there no multiple decrements?
Question 1: the fund can either provide the annuity itself or pass on the risk to an insurer. The fund would want to minimise the risk, so they would want to pay out as little as possible on these annuities. The longer a life lives, the more it will cost the fund. So they would prefer to provide for the unhealthy lives. On the other hand, the fund would want to pass on the healthy lives to an insurer because if they had to provide for these healthy lives themselves, it would cost them relatively dearly. This is an example of adverse selection because the insurer can select against the insurer by holding onto the good risks (in this case, the unhealthy lives) and pass on the poor risks (in this case, the healthy lives).
I think your thinking of the question applies more to an assurance product and not an annuity product. In general, there would be little underwriting for an annuity product because a sick life wouldn't normally take out such a product. In fact, an insurer would be happy if more sick lives bought annuities.
Or at least that's how I understood the question.
Last edited by a moderator: Sep 16, 2006