Sept 22 Q3 i)

[Actuary@22]

Hi

Pls explain why as per examiners report,term introduces greater mortality risk than annuities? Mortality claims are less certain in general under term than annuties? If so so why?
or is it only because the question says that term book is small.

 

[Em Francis]

Yes, under a smaller book there is more random fluctuation risk, but also the fact that claim payments will be less certain under term assurance as they will depend on deaths, whereas annuities payments are guaranteed as long as the life is alive.

 

[Lindsay Smitherman]

Just to clarify, the question is asking about relative levels of liquidity risk. The term assurance portfolio would generate a higher liquidity risk because the claims are less predictable than for annuities in terms of their timing. For term assurances, liquidity may need to be found at any point, unexpectedly, during the period of the contract to pay a claim; the timing of the need for cash to pay the claim (which is often a very large amount) is unknown and would have a relatively high standard deviation. For annuities, the company knows that it needs liquidity to pay the guaranteed annuity benefits each year and can plan accordingly, particularly through choosing assets that cashflow match the expected liability payments.