The question is this:
A special 3-year endowment assurance policy provides that the death benefit payable
at the end of year of death is £10,000 plus the endowment assurance net premium
reserve for that year that would have been held had death not occurred. £10,000 is
payable on survival to the end of the 3 years.
On the basis set out below, use a discounted cash flow method to calculate the level
annual premium payable in advance for a life aged 57 exact. The requirement is that
at the discount rate defined below the value of the annual emerging surpluses should
sum to zero.
Basis: Mortality: AM92 Select for experience and reserves
Expenses: 20% of the first annual premium
5% of subsequent premiums
Reserves: Value as a normal endowment assurance for a 3-year term
on a net premium basis using a valuation rate of interest of
4% per annum. Ignore the effect on reserving of the extra
death benefit defined above.
Interest earnings: 7% per annum on cash flow
Discount rate: 10% per annum
Ignore tax and any other items.
In order to answer this question, a profit testing approach needs to be taken by setting up a table of cashflows including a cost of reserving entry. In the answer to this question the cost of reserving accounts for all policies and not just those where the policy is still in force. I don't understand why this is the case.
Last edited by a moderator: Aug 12, 2010