Hi,
I attempted the ST1 2009 September past paper, Q7ii.
This is about describing the investment strategy/backing assets for pre-funded LTCI which benefits can be either fixed monetary amount or indemnity basis.
As a pre-funded product, I am aware of the 2 phases: accumulation (before benefit payment) and claiming phase (after the long-term care definition is triggered. So my idea goes as:
Accumulation phase (pre-claim):
There is no benefit payment at all. The only outgo to meet are:
- Ongoing expenses, renewal commissions (Guaranteed Index) - Matched with real assets (corporate bonds, properties, equities)
- Possibly surrender value outgo for a pre-funded product - Matched with short term liquid assets (cash, fixed interest securities) as surrenders can happen anytime under a short notice
- Possibly the need to build up sufficient cash value to fund the claiming phase, so invest in equities for excessive returns. This is possible since a accumulation phase should be long enough to take investment risks.
Claiming phase (post-claim):
In addition to expenses, now we need to match the:
Fixed benefit (Guaranteed Monetary amount) - Matched with fix interest/government bonds + corporate bonds
Indemnity benefits (indemnity) - Long term indemnity in this case (unlike ST in PMI), so match with equities, corporate bonds
However I am struggling to understand the examiner's report.
There are pre & post-claim periods quoted too, but I am confused:
- Why there are benefits, both long term guaranteed and indemnity, in the pre-claim phase?
- If benefits are already paid in the "pre-claim" phase, then what is left for post-claim?
In the solution, it discusses short term liabilities for this post-claim phase.
My understanding of a pre-funded LTCI is it is considered a long term product, for both the accumulation and claim payment phase.
The purpose of LTCI is to hedge against longevity risks. In particular, the long term care costs whilst being alive.
Therefore, neither of the phase should be considered short term (although probable shorter longevity due to impaired life).
Is there something I am missing out to understand the examiner report?
Trevor
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