Sep 2009 Qn 6

Part ii
I had a go at this and had pursuing a risky investment strategy (ALM mismatch) in the hope of higher returns as one of the reasons for Y holding a level of capital significantly higher than reg requirements.This didnt appear on the suggested answer list.Not sure what am I missing here
Part iii
I had exiting capital intensive business lines like With profits business with guarantees as one choice for reducing overall capital requirements.This also didnt make it to the marking list and I cant see why...

Help

 

It may be that either or both of your answers would be marked correct. Here are some possible reasons for them not being on the list though:

Part ii)
The riskiness of the investment strategy will be factored into the regulatory capital requirement so it's not clear that there's any need allow for it again here.

Part iii)
I'm not a life insurance specialist, but the thing about exiting capital intensive lines is that it will have an effect but it might take a while to become noticeable, especially for long-tailed lines, since you've still got a lot of that business on the books. Taking out reinsurance on the historic business might be a better answer.

 

I agree. In addition for part (iii), I think exiting WP business might not be a good strategy since this could be the only main profit churning business. However reducing guarantees could reduce capital requirement but would reduce marketability. This question does not consider the options which reduces marketability or profitability.

 

OK, but I would add that one reason why candidates miss easy marks in the later exams is because they over-censor their answers. If the question says, “Discuss how you could …”, don’t leave out answers on the basis that they may have other knock-on effects that make them a poor overall strategy. It’s a remarkably easy trap to fall into. My strategy in CA1 and the specialist subjects was to write down everything I thought of, and it seemed to work.

 

Thank you for the replies...
Tutors can I have some feedback on this?

 

Thank you for your reply Katherine..Surely in the past (in the UK) we have had companies who have sold their with profit funds/business with onerous guarantees to other companies as they clearly wanted to exit that line of business!
I had this in mind when I put this point for part III

Since you do agree with whats said here can I infer that there is scope for gaining marks for points which are not mentioned on the marking schedule(past ii ,riskier investment strategy)

 

vikky, I feel we still haven't answered your question about why your answer to part iii may not have been deemed valid. To be clear, if I'd thought of it, I probably would have written it down for exactly the reason that Katherine said. But then there's the question of whether we can learn anything from the mark scheme.

I think probably the important point here is that "exiting" a line of business can cover a multitude of different possibilities and you probably need to be clear about which one you're talking about. One possibility is that you simply stop writing it and run off your existing business to exhaustion. But this does not produce any immediate capital saving.

Another is that you create a new company with all the business that you want to get rid of and then sell off that company to another company. I can think of several reasons why this may not have been accepted, not least that you're starting to reverse out the transaction you've just done; a trivial answer to the question might be that the group XY could sell off company Y again and return to where it started.

A further possibility is the one I suggested of reinsuring the historic business away. Despite the fact that the group XY would still carry the risk of reinsurer default, the capital requirement would almost certainly reduce. However, this could be regarded as a repetition of an answer the examiners have already given, namely: "The company may also revise its reinsurance arrangements in order to make efficient use of capital", and therefore not be awarded an extra mark.

The mark schemes do sometimes miss valid answers, especially with the more open-ended questions, and occasionally extra marks could be gained for including these answers. However, on the great majority of occasions, if there's something missing from the final examiners report there's a good reason for it and it probably means you wouldn't have got the mark.

 

Katherine, why does ASET then usually consider many points not in the Examiner's Report?

 

I think the steer is pen down whatever you can think of and then hope for the best
Unfortunately there is very little clarity on how to condition our thought process to answer these questions or where the thought process is going wrong....am going nuts with some of the answers that I see on the marking schedule...

 

Dude Im the one that is really going nuts! I cant seem to figure out what I'm doing wrong, but l'll just keep going.