Chapter_1_and_2_Problem_Solutions

Chapter_1_and_2_Prob - ACTSC 232 Spring 2011 Solutions to Chapter 1 and 2 Book Problems Exercise 1.1 Insurers generally require evidence of health

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ACTSC 232 – Spring 2011 Solutions to Chapter 1 and 2 Book Problems Exercise 1.1 Insurers generally require evidence of health from a person applying for life insurance in order to prevent adverse selection (also sometimes called anti-selection ). If insurers did not require evidence of health for people applying for life insurance, the least healthy individuals would choose to purchase life insurance in disproportionately high numbers. Since the expected benefit payouts are larger for these people, this would likely lead to significant expected losses for the insurer. Because the value of the payout for a life annuity increases as the purchaser lives longer, there is no danger of adverse selection by less healthy individuals for life annuities. (For various reasons that we’ll discuss in class, the danger of adverse selection by people with exceptional longevity is much less pronounced.) It is also the case the life insurance companies use health information in order to classify the potential life insurance policyholders into risk categories or to assess what, if any, ad- ditional premium amounts should be paid by the policyholder in order to cover the risks of the life insurance policy. On the other hand, with some exceptions, annuities are generally not issued in different risk classifications. Exercise 1.7 Note: Below are a few of the advantages and disadvantages I immediately thought of; this is not an exhaustive list. (a) Advantages: He is guaranteed a steady source of income for the remainder of his life, no matter how long he lives. Disadvantages: If he dies soon, he will likely not receive as much money from the annuity as he paid for it. If his cost of living increases substantially, the level amount may become inadequate at some future date. There will be no capital remaining for other purposes (e.g., final expenses, estate taxes, inheritance). (b) Advantages: 1
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He is guaranteed a steady source of income for the remainder of his life, no matter how long he lives. He is guaranteed that his income will rise proportionally to the cost of living. Disadvantages:
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This note was uploaded on 07/13/2011 for the course ACSTC 231 taught by Professor Chris during the Spring '11 term at Waterloo.

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Chapter_1_and_2_Prob - ACTSC 232 Spring 2011 Solutions to Chapter 1 and 2 Book Problems Exercise 1.1 Insurers generally require evidence of health

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