September 2013 Question 4

The solution says "There is currently no proposed limit on the age at which the increase can occur which will increase the risk at older ages...." Is this not covered in the premium and thus reduce the risk? Please explain.

The solution says "The system will need to allow for the complexity of the multiple exercise dates". Why is this an issue?

The solution says the following:
"Restrict the times at which the sum assured can be increased e.g. only allow the sum assured to be increased at 5 yearly intervals". How will this help?
"A maximum age at which it can be exercised e.g. up to a maximum age of 65". Does age matter if premiums cover this?
"Reduce the limit that applies" e.g. 50% of the level of increase could be made". Does the premium not cover this risk?
"Sum assured increases could be made age dependent such that the level of increases reduces as the age of policyholder increases". Doesn't premiums cover this?

Please explain.

 

A day has 24 hours. the internet contains lots of information, as does an actuarial course. Discuss how these two facts could be used to solve some of your problems.

 

I think you are struggling because at this stage of your learning you haven't mastered exam technique.

Regarding your first two points these are in relation to part (I) of the question. You are asked to Discuss a proposal. So this means say the pros and cons of it. So, in pricing you make an assumption of what will happen. So estimate the age at which people may use their option. It's a whole life contract and so the biggest risks are people altering the policy when older than assumed. The other is relevant because you have to be able to administer the option hence may need new systems/processes etc.

The rest of your comments relate to part (II). If you didn't pick up on the fact that with options there is a risk of anti selection against companies. Hence these tweaks reduce scope for anti selection and reducing the risk of losses to the company when the option is exercised.

 

Thanks bystander.

 

Can I ask why this increases risk?

"There is currently no proposed limit on the age at which the increase can occur which will increase the risk at older ages...."

If we are charging premiums at the point of exercising the option which are dependent upon the age of the individual, why does increasing the sum assured at an older age increase the risk relative to a younger age?

 

Thanks very much. Very helpful.