Hello,
Can someone please clarify the solution for few parts in this attempt?
1. iii) b) Can this increase in expense be considered as a one off increase in expense and not the expected future expense level? If so, assets would reduce to reflect cash payment of expense. How can we distinguish between this one-off increase vs usual increase in expense with the wording of question?
For required capital, an increase in future expense will increase BEL. As the required capital is calculated using standard formula, it is (unstressed net assets)-(stressed net assets). Net assets= assets- BEL. Hence, if BEL increases net assets will reduce and the required capital will reduce but the solution mentions that it will increase. Why so?
c)
How will BEL reduce in this case? Can we consider widening of credit spread leading to revoke of the matching adjustments? This widening of spread may lead to the insurance company changing its investment strategy to reduce risk exposure and hence the matching adjustment may not be permitted with the new asset-liability matching.
Is there any relevant part of core reading for understanding this movement?
d)
For required capital, I understand that higher stress will be applied for default risk module and will increase stressed net assets but as the required capital= unstressed net assets- stressed net assets, how will the required capital still increase? Similar doubt as part b)
2. v) How did we calculate estate distribution and maturity smoothing component? I followed the calculations for previous part of this question but could not understand the logic for these two components only. Also, are we assuming that estate is used for smoothing or is it implied anywhere in the question?
vi) Can we also discuss how the WPA will look at the model for calculating reserve of with-profit policies? Whether appropriate data checks and assumptions are in place for the model to avoid possibility of under-reserving and protecting policyholders?
vii) Apart from commenting about maturity, surrender, death, estate and expense, can we not comment about few items mentioned as method for with profits management of a closed block? For example- changing unit linked charges, need for a formal run-off plan, selling off the business to prevent large expense as the fund is declining, reviewing balance between terminal and reversionary bonus, etc.
This attempt seemed to be hard overall although the questions were interesting.
Thank you in advance!
Can someone please clarify the solution for few parts in this attempt?
1. iii) b) Can this increase in expense be considered as a one off increase in expense and not the expected future expense level? If so, assets would reduce to reflect cash payment of expense. How can we distinguish between this one-off increase vs usual increase in expense with the wording of question?
For required capital, an increase in future expense will increase BEL. As the required capital is calculated using standard formula, it is (unstressed net assets)-(stressed net assets). Net assets= assets- BEL. Hence, if BEL increases net assets will reduce and the required capital will reduce but the solution mentions that it will increase. Why so?
c)
How will BEL reduce in this case? Can we consider widening of credit spread leading to revoke of the matching adjustments? This widening of spread may lead to the insurance company changing its investment strategy to reduce risk exposure and hence the matching adjustment may not be permitted with the new asset-liability matching.
Is there any relevant part of core reading for understanding this movement?
d)
For required capital, I understand that higher stress will be applied for default risk module and will increase stressed net assets but as the required capital= unstressed net assets- stressed net assets, how will the required capital still increase? Similar doubt as part b)
2. v) How did we calculate estate distribution and maturity smoothing component? I followed the calculations for previous part of this question but could not understand the logic for these two components only. Also, are we assuming that estate is used for smoothing or is it implied anywhere in the question?
vi) Can we also discuss how the WPA will look at the model for calculating reserve of with-profit policies? Whether appropriate data checks and assumptions are in place for the model to avoid possibility of under-reserving and protecting policyholders?
vii) Apart from commenting about maturity, surrender, death, estate and expense, can we not comment about few items mentioned as method for with profits management of a closed block? For example- changing unit linked charges, need for a formal run-off plan, selling off the business to prevent large expense as the fund is declining, reviewing balance between terminal and reversionary bonus, etc.
This attempt seemed to be hard overall although the questions were interesting.
Thank you in advance!