April 2015 Q5iii)

[Kiran]

Hi

I have a question regarding how to answer some of the longer questions. I won't copy in what the examiner report gives as the solution, but ive copied a sample of what i answered for the question. Just interested if im still valid points/ if i would receive credit, or if im way off the mark.
Edit: Is this the differnece because it sounds like ive geared my answers more towards a pricing approach rather than a supervisory valuation?

· Investment Return/unit growth

· This will depend on assets that policyholders have invested in, more volatile funds will yield higher returns and unit growth

· Economic environment and government policies will also effect how large the returns are depending on how the market reacts. Large returns can be expected in a boom, whereas negative or small returns in a recession

· Lower growth rate is more prudent

· Risk discount rate

· This will depend on the regulatory basis company may use for supervisory valuation

· Can depend on country

· Generally risk free rates using swaps or gilts so will depend on market movements and can be effected by the governments credit rating

· Expenses/Commission

· Initial expenses – will depend on how product is sold, i.e. intermediary brokers which are more expensive (resulting in higher expense and need to pay commission), as well as underwriting undertaken. More underwriting carried out the more expensive it is resulting in higher charges. These could be covered by the allocation rate to reduce new business strain.

· On-going expenses – will depend on the overheads of the business such as salary, rent, computer systems and admin work resulting from the policies. Will be the basis to derive per policy expenses which could be covered by the flat fee. Would also need expected future values of CPI to account for expense inflation, and ensure the fee can cover future expenses, by having it high or reviewable

· Investment expenses and fund based commission will be based on what types of assets and funds policyholders invest in. More volatile funds with higher returns will tend to have higher expenses and commission, this will form the basis on what the company charge in terms of AMC %

· Also termination expenses, regarding surrenders and deaths, however this could be added onto the fixed rate fee

· Switch fee is likely to depend on unit fund size and economic environment, if returns are low, potentially more switches as policyholders seek higher returns

Regards

Kiran

 

[Mark Willder]

Hi

I have a question regarding how to answer some of the longer questions. I won't copy in what the examiner report gives as the solution, but ive copied a sample of what i answered for the question. Just interested if im still valid points/ if i would receive credit, or if im way off the mark.
Edit: Is this the differnece because it sounds like ive geared my answers more towards a pricing approach rather than a supervisory valuation?

· Investment Return/unit growth

· This will depend on assets that policyholders have invested in, more volatile funds will yield higher returns and unit growth

· Economic environment and government policies will also effect how large the returns are depending on how the market reacts. Large returns can be expected in a boom, whereas negative or small returns in a recession

· Lower growth rate is more prudent

· Risk discount rate

· This will depend on the regulatory basis company may use for supervisory valuation

· Can depend on country

· Generally risk free rates using swaps or gilts so will depend on market movements and can be effected by the governments credit rating

· Expenses/Commission

· Initial expenses – will depend on how product is sold, i.e. intermediary brokers which are more expensive (resulting in higher expense and need to pay commission), as well as underwriting undertaken. More underwriting carried out the more expensive it is resulting in higher charges. These could be covered by the allocation rate to reduce new business strain.

· On-going expenses – will depend on the overheads of the business such as salary, rent, computer systems and admin work resulting from the policies. Will be the basis to derive per policy expenses which could be covered by the flat fee. Would also need expected future values of CPI to account for expense inflation, and ensure the fee can cover future expenses, by having it high or reviewable

· Investment expenses and fund based commission will be based on what types of assets and funds policyholders invest in. More volatile funds with higher returns will tend to have higher expenses and commission, this will form the basis on what the company charge in terms of AMC %

· Also termination expenses, regarding surrenders and deaths, however this could be added onto the fixed rate fee

· Switch fee is likely to depend on unit fund size and economic environment, if returns are low, potentially more switches as policyholders seek higher returns

Regards

Kiran

Hi Kiran

The best way to get detailed feedback on your solutions is to attempt the assignments and mocks and have them marked.

Your solution would certainly score some marks, but I agree that your answer is more based around pricing rather than reserving. So for example, there are no marks for risk discount rate (this is used to discount profits in pricing) or initial expenses (these have already happened when reserving for in force policies).

You've spent a lot of time thinking about what the expenses are - which doesn't really matter when calculating the reserves. Instead you need to describe how we set an assumption, which means performing an expense analysis. So think about how you can use data from the past to set assumptions, rather than what might happen in the future (discussion of possible booms and busts is highly subjective and wouldn't form part of reserving calculations).

I hope this helps.

Best wishes

Mark

 

[Kiran]

Thanks Mark