Question X1.1 A proprietary life insurance company is planning to launch a guaranteed equity product for the first time. You are the Product Pricing Actuary and, after some initial research and discussion with the Marketing Manager, the draft product design is: Single premium index-linked endowment assurance. After a one-month offer period all premiums are invested on the same date for a five-year term. The minimum premium is £10,000. There is no maximum premium. The default allocation rate is 100%. An extra 1% is given on premiums exceeding £25,000. The maturity value will be X% of the allocated amount plus Y% of the growth in the FTSE-100 in excess of Z%, where X, Y and Z are yet to be determined. The surrender terms are discretionary. The death benefit will be the greater of the allocated amount and 101% of the surrender value. You have spoken to an investment bank about suitable assets with which to back the product, possibly alongside UK equities, and they are happy to create and supply a mixture of any or all of the following: Zero-coupon bonds Call options on the FTSE-100 index Put options on the FTSE-100 index. Solution says : NB Mix Risk - although there is an allocation rate structure, there will still be cross-subsidies between different sizes of policy due to charges & expenses mismatch. pls explain why?
Hello Because the charge structure won’t leave us so that expense outgo = charge income for every policy sizes. Expenses are a mix of some which will vary depending on the size of the premium invested and some which will be a fixed amount per policy. The charge structure (with a more generous allocation rate for larger premiums) reflects this to some extent, but not perfectly, so there’s still NB mix risk. Hope this helps Lynn
