SP2

#3.

Change in assumptions with paid-up option:

1. Assumption for the option take – up rate will need to be determined.

2. Additional administrative expenses relating to the option will be added during the pricing.
3. Total expense assumption would be expected to be higher.
4. Lapse rates should be fall, since the paid-up option will provide the policyholders to cease
the premium payment and still receive benefit.
5. However, the impact on assumption for lapse would depend on the difference in the
benefits between the surrender value & paid-up option.
6. If the paid up provides higher benefit then lapse rates would reduce else, lapse rates would
increase if surrender benefit is in the money for the policyholder.
7. Impact on mortality assumption for people exercising the option.
8. Impact on mortality assumption for people not exercising the option and continuing the
policy as usual.
9. Interest rate assumption may change if the paid-up option alters the investment strategy
then discount rate used in prospecitive pricing would be impacted.
10. Company may also wish to adjust the profit margin with the addition of the paid-up option.
11. Any regulatory implications relating to paid-up policies will need to be complied with, hence
adjusting the pricing assumptions.
12. Impact on investment return? Since this is a without profits product, impact on investment
return assumption should be minimal.
13. Tax assumption may vary with respect to paid up policies and should be considered during
the pricing.
14. Reserving assumption will be updated for the policies with paid-up option and that would
impact the capital & solvency requirements. Hence, there would be an overall impact on the
reserves at company level.
15. If the policyholders deem this product to be beneficial with increased value then the
volumne of new business will be higher and there might be a change in the new business
mix.

#4.

Data anomalies that could be highlighted under each check:

1. First life age

 The value of the first life age could be extreme values such as significant higher or lower age.
 Policyholder age range would be expected to around the standard retirement age of 60.
 Any outlier value would be highlighted.
 This would highlight any data related error.

2. First life vs Second life age

  For joint life policies, the ages for both lives should be aligned.
 For example, spouses age would usually be expected to be within 5 – 10 years age gap.
 Significant discrepancy may indicate data error or errors in underwriting.

3. Second Life annuity percentage

 Any data point with extremely high or low annuity percentage would be highlighted that
could be due to data entry issue or data error.
 High percentage would indicate unusual amount being paid to the policyholder that should
be checked and verified.

4. Original premium divided by annual annuitant amount

 If original premium is out of proportion to annual annuitant amount, then that may help in
identifying the errors related to policy information or data issues.
 The ratio should be well within an acceptable range.

5. Current annuity amount vs original annuity amount for policies with indexation

 For indexed policies, annuity amount should increased based on the inflation index. If the
ratio isn’t aligned with increasing expectation then it may indicate possible issues with the
underlying policies.

With these checks, companies can identify potential frauds or systematic errors in the data
recording. Further investigation should be carried out for each of the data errors.