Extras 8

Question 1

Explain the bid offer spread? Which one is buying and selling, highest and lowest?

Answer 1

Offer = high price = price to buy
Bid = low price = price to sell asset

Question 2

Which is the lowest, bid or offer?

Answer 2

BID!

Question 3

Is appropriation on offer or bid?

Answer 3

Offer

Question 4

What basis are units prices if a net seller of units? What does that mean for the bid/offer price?

Answer 4

Bid basis

Find bid and offer using expropriation price

Question 5

If company a net seller, what basis will it use, what’s the formula for offer price and bid price.
What about if it’s a net buyer?

Answer 5

Bid basis:
Offer price: (buying)
Expropriation price PLUS initial charge (bid-offer)
Bid Price (selling)
Expropriation price

Offer basis:
Offer price: (buying)
Appropriation price plus initial charge (bid-offer)
Bid Price (selling)
Appropriation price

Question 6

Explain what actuarial fund does?

Answer 6

Allows us to hold the present value of the unit fund

Question 7

Explain the actuarial funding factor formula?

Answer 7

Unit fund at t * A(x+t:n-t)
ie. PV of current unit fund paid at death
T=0 normally

Question 8

What formula shows the amount transferred to non-unit fund using actuarial funding

Answer 8

UF(0)*(1-A(x:n)) is transferred to the unit fund

ie. Difference between original unit fund and the PV of it

Question 9

Give an alternative to actuarial funding factor that takes credit for future charges, what loan does it represent

Answer 9

Negative non-unit reserves

One from policyholders with positive non unit reserves repaid on future emerging profits

Question 10

Give 3 constraints to negative non-unit reserves

Answer 10

Sum of all non-unit reserves >= 0
Sum of unit and non-unit reserve on policy >=guaranteed SV
Future profits must arise to repay loan

Question 11

What risk is transferred BACK to company by guaranteed (maturity, surrender or annuity option), why?

Answer 11

Investment risk, attractive

Question 12

What 2 guarantees are attractive on traditional policies?

Answer 12

Guaranteed Annuity Option

Guaranteed minimum maturity value on EA

Question 13

What’s the difference between risk of guarantees in a traditional policy or non-traditional policy

Answer 13

Company has no control over investment policy in non-traditional

Question 14

How to value an option or guarantee (2 ways)

Answer 14

Option pricing technique

Stochastic simulated investment performance

Question 15

Give 3 common mortality options

Answer 15

Additional benefit purchase without need for further health evidence
Renewable policy (no further health evidence)
Convertible policy - change part of SA from one contract to another

Question 16

Why use T’s and C’s for mortality options, explain what it means for premium rates

Answer 16

Reduce anti-selection

ie. Those in poor health using option to get large amounts of life insurance at rates not reflecting their condition

Question 17

Give some T’s and C’s examples for mortality options

Answer 17

Timing - fixed take up times
Birth child
Salary increase
SA(additional)<=SA(original)

Question 18

Explain the cost of a mortality option

Answer 18

Difference between price should have charged given full underwriting information and price actually charged

Question 19

What 2 assumptions over the normal pricing basis are needed to value a mortality option

Answer 19

P(option exercised)

qx of those who take-up option

Question 20

How to get the EPV of cost of mortality option

Answer 20

EPV(ben) - EPV (prem)