Hi all,
I have some questions from the booklets given out for tutorials 1 and 2. Please could people and tutors answer
Tutorial 1.
Exercise 4.
1. TA. The answer says an asset share is built up? I thought only small reserves were kept to pay out the few claims made and the premiums are taken as profit. Please can someone explain how the cash flows into and out of the company work for a TA?
3. Endowment Assurance. Are the death benefits a fixed amount (sum assured) or do they increase as the asset share is built up? If it’s a fixed amount this would be large losses for the company if death claims were at early durations.
4. Annuity. How are the payment amounts decided on? The answer says that on death of policyholder the per policy asset share increases but does this mean larger benefits (payouts) to the remaining policyholders? I don’t think it does? So why does the per policy asset share matter?
5. Receives investment income. I don’t exactly understand the answer?
Answer is “income would be apportioned in proportion to cohorts contribution to that income...
and reflecting the returns obtained on the asset portfolio backing the liabilities”
I think the first part of the sentence means that investment income is given out to each policyholder in proportion to home much they contributed to get this income. This means that policyholders receive investment come in proportion to their contribution to the initial investment -is this correct?
I’m not sure what the second sentence means?
Tutorial 2.
Market consistent valuation flow chart.
I’m unsure about the big picture idea of this? Are we saying assets are values at market value and so their yield is more than the risk free rate. Thus their present value is lower than if discounted by risk free rate.
Liabilities however are discounted at risk free rate giving a higher present value than market value discount. For non-market assumptions, the discounting is at “best estimate + risk margin” so their present value is lower than if discounted by best estimate.
So, the above is a prudent valuation to derive the supervisory balance sheet, such that “assets are discounted at high rates” and liabilities at “low”.
Thank you for your answers Click to expand...