Page 7 (ii) "If death benefits are only partially insured, ie insurance only covers the death benefits in excess of the reserve held for the member's retirement benefits, then mortality experience will be cost-neutral." Can anyone please explain this? Thanks
Take an example, the reserve is 4 and the death benefit is 5. You insure the remaining 1. If the person dies you have 4+1=5 which will cover the benefit exactly. The alternatives are not insuring as much, which leads to a strain when a member dies, or insuring more(eg the full death benefit) in which case some (or all) of the reserve held is no longer needed and the funds become surplus. If you insure the excess over the reserve, simply speaking (cause the values will never be exact), the following scenarios can happen. If the person lives, you need the reserve (for other benefits) which you're holding and the insurance pays nothing, ie you have exactly enough. If the person dies, you need the death benefit. You have the reserve and the insurance pays the balance. Again, you have exactly enough. The mortality experience does not affect the cost, ie cost neutral.
