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in BUS 3024S - Contingencies by (1.7k points)

Hi, this is from a past exam so no memo. Just wanted to know if my thinking was correct? 

Also, could you please help me with (a) ii and (b) or at least guide me if you have any ideas. 

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1 Answer

+1 vote
by (200 points)

Hi Matt, 

Obviously there is no memo but from looking at your workings for a) i, those steps seems sensible to me. Just at the end when you work out the extra premium, I think it should be P*-P since the insurer is likely to charge the life in worse health a higher premium since they would expect the death benefit to be payable sooner and thus would expect to receive less premiums. However, this not a major problem since you would have worked this out when subbing in the actual numbers. 

For a) ii, I am not sure if the syllabus at the time would have included bookwork to answer a question like this but it is likely that they want you to try and apply the theory you have learnt to the situation. I am not 100% sure what the correct answer would look like but checks I could think of would include: 

  • Checking if the additional premium is sufficient to cover the increased likelihood of the death benefit being payable sooner in the term
  • Checking if its sensible to apply a constant extra mortality for the impaired life in the first 10 years 
  • Checking past data on mortality experience of impaired lives to estimate the mortality of those lives and if it is in line with what they have assumed

For b), I am assuming that the normal basis applies to the normal mortality and interest rates used. An example of how I thought the policy could be modified would be to reduce the term of the Endowment Assurance (assuming this is allowed by the company and acceptable for the life). By doing this the premium charged to the impaired lives would increase, taking account of the increased risk of early death that those lives present to the insurer. From the question it appears that the insurer has assumed that the impaired life only has a higher force of mortality acting in the first 10 years. By reducing the term to say 15 years for example, we are able to more accurately reflect our assumptions of the life expectancy of those groups of lives and charge a more appropriate premium. 

I hope that this helps and these are just my opinions of how the answer could look (not sure if they are right). Let me know if you need any further help for this question.