Interview ques of CT5

[aparnaParticipant]

Hii guyz,

I have a query. Kindly help me with this.

Actually, once in my interview my interviewer asked me that suppose you have your own insurance business so if the interest rates are increasing then in what way you will pay the annuities to policyholder like in due or in arrear? Explain.

But i didn’t understand the exact concept behind this please help me if anyone has any idea about this.

Thanks

Aparna Malhotra

Sent from my A1601 using Actuarial Info mobile app

[Arpit SuranaParticipant]

Firstly, the terms and conditions of the annuity contract are defined. So it’s very unlikely to change the time of payment of the annuity.

If it is possible to change the term, then I will choose to pay in advance because the PV of all the future payments will be less than.

[nancydhingraParticipant]

In any circumstance, i think, the insurer would prefer to pay in arrear. As in the case of a whole life annuity, the value of annuity due is always greater than annuity arrear (at a particular age).

This is because of added factor, ie the probabity of survival.

Annuity due has one payment assured whereas arrear does not

I am not sure of my ans though. If i am wrong , do correct

Sent from my iPhone using Tapatalk

[Arpit SuranaParticipant]

nancydhingra wrote:

In any circumstance, i think, the insurer would prefer to pay in arrear. As in the case of a whole life annuity, the value of annuity due is always greater than annuity arrear (at a particular age).

This is because of added factor, ie the probabity of survival.

Annuity due has one payment assured whereas arrear does not

I am not sure of my ans though. If i am wrong , do correct

Sent from my iPhone using Tapatalk

Hi Nancy,

I am unable to understand your point of view… Could you please elaborate.

[nancydhingraParticipant]

For an example,

Suppose the policyholder dies in first year of payment. If he has bought annuity due, insurer must have paid him once. But if he has bought annuity arrear, insurer won’t have to pay anything at the end of the year.

You can see it through the formula of whole life annuity too.

ax=äx-1

This implies PV of due annuity is always greater than arrear

Sent from my iPhone using Tapatalk

[nancydhingraParticipant]

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

Sent from my iPhone using Tapatalk

[shreyanshhParticipant]

nancydhingra wrote:

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

Sent from my iPhone using Tapatalk

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.

Sent from my S6s using Actuarial Info mobile app

[Author]

Posts