apr 2014 q1 iv

[dimitris13]

hi ,
it says that the cos increases.
but in the solution it explains that if we reduce the smoothing the cos will reduce. which is the opposite dir3ction. why is that?

thanks

 

[Em Francis]

hi ,
it says that the cos increases.
but in the solution it explains that if we reduce the smoothing the cos will reduce. which is the opposite dir3ction. why is that?

thanks

If reversionary bonuses are reduced, the guaranteed benefit may now be lower than smoothed asset share and so maturity will be based on smoothed asset share; increasing the cost of smoothing. However, if less smoothing is applied then the difference between the g'teed benefit and the smoothed asset share will be smaller; reducing cost of smoothing.
Does that make sense?
Thanks
Em

 

[dimitris13]

it makes sense. thanks.
but in the q it says to descuss an increase in cos. here we explain the opposite.

 

[Em Francis]

hi ,
it says that the cos increases.
but in the solution it explains that if we reduce the smoothing the cos will reduce. which is the opposite dir3ction. why is that?

thanks

It is a 'Discuss' question so you will need to consider whether the direction of movement in the cost of guarantees and smoothing fit in with the potential actions. In this case, it doesn't.
You could have started your point with "However, ......"