Question

This is an Insurance accounting question

Explain the likely effect of the following occurances on the valuation of Insurance liabilities and the valuation of pension liabilities. Explain why the effects may be likely

i. Increased longevity

ii. A fall in interest rates

iii. Salary Increases

iv. Increased Surrenders

v. Increased lapses

vi. Increased mortality

vii. Depressed economic conditions

viii. Increase in persons switching jobs- a)Total premium written - $10,640,000.00, b) Unearned premium bf = 100 claims reported

Answer 1

i. For the insurer or provider of pension plan, increased longevity results in pay outs higher than the expected amount of pay out. This is obviously a con to the insurer or provider of pension plan

ii. Low interest rates results in lower sales and lower income to them which is not the right choice for the corporate.

iii. If salary increases the valuation in liability shows an increased trend in liabilities as it is increasing the cost to company in case of insurance or pension corporate.

iv. the pay out ratio will be more as indicated in the option itself 'increased surrender' and it a negative effect on the insurer and pension providers.

v. Increased lapses will decrease the sale volume of the insurer as the customer hate delay in pay out of the surrender valued amount or the interest aspect. so this has definitely a negative effect on them.

vi. As there is not consistency in expected mortality rate the negative effect on them will be higher than the positive income rate.

vii.The people tend to save more money in this crisis so there will be no policy making with them and so it has a negative effect in terms of financial crisis.

viii. The insurance company has the responsibility to clear the policy even if any errors has been occurred even when the person is switching job unless and until a blunder mistake has been taken place. As it shows an increased trend, obviously it has a negative effect on the insurance company.