FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
A life insurer faces an unexpected rise in the longevity of its annuitants. Compared with its book of term life policies, which statement best describes the effect on the insurer?
Longer lifespans hurt the annuity book and benefit the term life book. Annuities pay for as long as the annuitant lives, so longevity raises costs, while term life pays on death within a fixed period, so fewer deaths mean fewer claims. The two exposures partly offset each other.
- ALonger lifespans hurt the annuity book but benefit the term life bookCorrect
- BLonger lifespans benefit both books because premiums are collected for longer
- CLonger lifespans hurt both books because reserves must increase
- DLonger lifespans benefit the annuity book but hurt the term life book
Explanation
Annuities pay while the annuitant is alive, so longer life raises the payouts and hurts the insurer (longevity risk). Term life pays on death within the term, so people living longer reduces claims and helps the insurer. This natural offset is why life insurers can partly hedge mortality and longevity exposure. The other options ignore the opposite direction of the two exposures.
Did you get it right without looking?
One question tells you little. A timed set on Insurance Companies and Pension Plans shows your real accuracy, how long you take and where you lose marks.
More Insurance Companies and Pension Plans questions
- A defined benefit plan has assets of USD 80 million and a present value of accrued benefit obligations of USD 100 million. Assets are expect…
- A pension plan sponsor holds a group of retirees and discovers that actual longevity is improving faster than the mortality table used to va…
- An insurer issues a one-year term policy with a death benefit of 500,000 to a person whose probability of dying within the year is 0.4%. Ben…
- A DB plan has assets of USD 480 million and a projected benefit obligation (PBO) of USD 600 million. The sponsor's market capitalization is …
- A mortality table shows 90,000 persons alive at age 40 and 89,100 alive at age 41. What is the one-year probability that a person aged 40 di…
- An insurer writes a policy that pays a fixed death benefit and carries a level premium for the insured's whole life, with a cash value that …