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2022 April Q2(iii)

J

Joi

Keen member
Hi,
The company has identified a material positive investment variance on its without profits immediate annuity business in the latest annual analysis of MCEV.
(iii) Discuss the actions the company may take as a result of this positive investment variance

The question mentioned action on positive investment variance - my understanding for positive variances is that the actual return better than expected - so they should take more risky investment

However, the answers mentioned about:
- The company might want to amend its investment strategy to take on less investment risk.
- It would want to reduce its investment in risky volatile assets, eg investments in equity release / commercial mortgages and increase its investment in safer assets such as government bonds

Why is this the case?
 
Hi - good question!

The company might have been attempting to match its immediate annuity portfolio asset and liability cashflows, and the appearance of this variance indicates that the matching is not as close as it had hoped.

Similarly, the appearance of a variance (albeit a positive one) could be a reminder that although it got lucky this time and the movement went in a favourable direction, it could easily have gone the other way. So the insurer might want to move into less risky, better matched assets in order to reduce the risk of a negative variance in future.
 
Thanks,

If my answer is to invest in riskier assets because the company has positive variance and should take advantage of this opportunity for higher returns
Do I still get marks? - because i did not see any answers about should increase investment risk, so just to confirm if this answer is "wrong" or "acceptable"
 
Obviously we can't say whether or not you would have got marks, as that would have been down to the IFoA examiner and the instructions they gave to the markers. However, based on the points in the Examiners' Report it seems unlikely that this would have gained credit.

Remember that this is without-profits immediate annuity business. An investment variance would indicate that there is some degree of risk (or mismatch) within the investment strategy. As indicated above, the insurer's reaction would likely be to reduce the risk / mismatch (to avoid the risk of a loss) if the variance was unexpected and/or went beyond its risk tolerance.
 
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