Reply To: Interview ques of CT5
shreyanshh
But if you think this way, there is no role of interest rate.
If the PV of annuities differ, so will their price. Will it matter to insurer, what the policyholder is buying?
Now i am also confused
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The terms of the contract are predetermined always so if the interest rates are changing after the contract is done, it will not at all affect the contract.
Suppose, if the annuity payments are linked to the business interest rates and the interest rates are increasing, so we will obviously choose advance annuity in this case over arrears.
Given the price of both the annuity is same and payment and term of both the annuity is same, the insurer will always prefer arrear annuity to advance.
Reason-. If we take out the internal rate of return(IRR) of both the contract, it will be greater for the advance annuity.
See, according to what you are saying is for a given interest rate, the PV of both the annuity will be different and so will be their price. Hence the IRR of both the contract will be same and payment of both the annuity will differ (higher for arrear payments).
The expected cost of both the annuity will be same for the employer in this case so it will not make any difference.
The answer to the question is a bit subjective and depends on how you look at the question.
I hope it helps.
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