Chapter 22: Pricing (4) Flashcards
Discuss the theoretical cost of the option
cost of the option is thevalue of the excess premium that should, in light of full underwriting, have been charged for the additional insurance over the standard premium rate that is charged
for some lives the option has no cost, eg healthy lives meeting normal underwriting requirements
total expected costs depend on the health status of those who choose to exercise the option, and the proportion of eligible lives who choose to exercise the option
Describe the factors influencing the cost of an option
term of the policy with the option:
Longer the term, more likely that policyholder health will make the option appear worthwhile
number of times policyholder gets the chance to exercise option:
Restricting the number of times can be used to reduce anti-selection
terms and conditions relating to exercising option:
Should be designed to reduce anti-selection, eg qualifying event
proportion of eligible lives who exercise option:
smaller proportion of eligible lives who exercise option => worse will be their subsequent mortality/ morbidity experience
encouragement given to policyholders to exercise option:
More encouragement can increase take-up rates, especially by healthy lives
extra cost to policyholder who exercises the option:
If extra cost too high, healthy lives might look for the same cover cheaper elsewhere
Discuss the3 main methodsto valuehealth options
North American method:
method assumes a proportion of all eligible policyholders exercise the option
and that their claims experience will be significantly higher than the corresponding ultimate claims experience
this method can handle many option dates using probabilities
cost of the option is the expected present value of future loss from the option (benefits and expenses less premiums for the option policy)
cost of the option will usually be spread and charged as a level addition to the premium for the original policy
Limitations:difficult to obtain sufficient data to estimate all the decrement rates
Conventional method:
method assumes all eligible lives will exercise the option
and will be subject to ultimate claims experience
if a policy has many option dates, then it is assumed policyholders choose the option that leads to greatest cost to the insurer
cost of the option is the expected present value of future loss from the option (benefits and expenses less premiums for the option policy)
cost of the option will usually be spread and charged as a level addition to the premium for the original policy
Limitations:difficulty when there are many option dates, or when there are multiple options that can be exercised on some (or all) of the option dates
Stochastic modelling:
future experience is projected stochastically and the numbers taking up the options and their subsequentmortality/morbidity experienceinvestigated
A large number of simulations will be conducted and the cost of the option will be calculated with a particular statistical degree of confidence
