Question
In exchange for covering all those annuity risks (i.e., be responsible to pay out all future payments to annuitants), Insurer B wishes to charge Insurer
In exchange for covering all those annuity risks (i.e., be responsible to pay out all future payments to annuitants), Insurer B wishes to charge Insurer A a Premium (payable now) proportional to the EPV of all payments, as follows: = EPV where > 0. However, the specific value has not been determined yet. After conducting a financial risk appetite assessment of Insurer A, your manager has concluded that their overall attitude towards financial risk is aptly characterised by an exponential utility function: () = 1 exp (), where is expressed in MILLIONS of dollars. That is, (1) provides the utility of a wealth of 1 million dollars. You also know that the total initial wealth of Insurer A is 12 million, and they wish to make decisions by maximising the expected utility of the Present Value of their total wealth. Given this context, answer the following questions. 1. Without doing any simulations (nor complex calculations), your manager tells you that the maximum Insurer A is willing to accept should be higher than 1. Do you agree with her? Please explain your answer, qualitatively. a=0.03
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