Hi I have a few queries from the tutorial question pack I was hoping someone could answer: Qu18- could you explain why deterministic or stochastic modelling shoule be used? There were a examples where I didn't understand why one method was chosen and not the other. Qu11- why does the pp AS depend on whether a profit or loss is made on a surrender? I thought the numerator for the pp AS was the same as the cohort formula and this is not mentioned in the cohort explanations. Qu13- why is negative inflation a problem? Is it due to marketing risk/ not obtaining a real return? Also, why is there a marketing risk for UL annuities?
Hi A good guideline is to suggest using a stochastic approach whenever we're not interested in just the central, best estimate of the future. For example, if we're looking at insolvency or the biting of a guarantee. Several of the examples do have an "either" answer though - there aren't many absolute rules. Things such as ease of communication and importance of the task come into play too. The cohort AS goes down by the SV paid. When we divide by number of pols in force to get the pp AS this is equivalent to whether there's a profit or loss on surrender. A numerical example might help make this clearer. Imagine we have a cohort of 10 policies, total cohort AS = 10,000 and so ppAS = 1,000. If one of the policies surrenders and the SV is 1,000, then the cohort AS is 9,000 and the ppAS = 9,000/9 = 1,000 (ie unchanged as the SV = AS). If the surrendering policy had been paid a SV of 100 say, then the cohort AS would be 9,900 and the ppAS = 9,900/9=1,100 (ie cohort AS decreases by SV paid, pp AS increases by profit on surrender / no of pols). Negative inflation because of the guaranteed money back guarantee that would then bite on the bond. Marketing for the UL annuity because it's a relatively unusual/compicated product. Hope these help and that the studying's going well Cheers
