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Sept 06

D

Dha

Member
Anyone else sit this exam? I found it tough enough. I just couldn't do the mortality profit question, though i don't think it was very hard. My mind just went blank. The profit testing was very straight forward. The second last question that required you to calculate the variance obviously involved some trick that I wasn't aware of. I thought question 1 was most peculiar. The obvious answer was that healthy lives could get better deals from the insurer, and sick lives wanted to avoid the underwriting so would stick with the fund. So it was a simple example of adverse selection. But the question did say that the fund got to choose whether or not to buy from the insurer, as opposed to the life themself who made the decision. So does this invalidate my solution, or am I just reading it wrong?
 
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.
 
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