Just curious what does MI stand for in the Examiner's Report answer about treating customers fairly: "Will need to ensure appropriate controls are in place and MI to monitor effectiveness of TCF strategy" I thought in SA2 MI stands for microinsurance?
Another general question on this product: Example, the premium recieved is 100, 10 goes to charges, 85 to fixed bonds and 5 to call option at t=0. Now, if a surrender happens at t = 3, 85 accumulated at fixed bond rate is given to the policyholder. My question is on the duration of these fixed bonds. Would they be for 5-years or 1-year? If 5 years, then early redemption could lead to other risks for the insurer - example, interest rates are up so the value of redeemed bond is lower than 85 * (1 + fixed rate) ^ 3? So how does the insurer meet the shortfall? If 1-year, then there is a reinvestment risk, but this is not mentioned as a potential risk in the answer. Please help.
There is no reinvestment risk as the bonds do not have to be repurchased once there is a surrender. The policyholder will just receive the value of the fixed interest bond at the time of surrender. The guarantee is in relation to the maturity (ie five years) and so the company will likely back this with five-year bonds.
Thanks, so upon a surrender, does the redeemed value of the bond be sensitive to interest rate movements as well as any penalties? Just trying to understand the spread risk here, if the value of bond falls should interest rates go up at the time of surrender?
Do you mean if interest rates go up, does the value of the bond fall? If so, yes. But it is not a risk for the company as there is no guaranteed value on surrender.
