April 2019

Discussion in 'SA2' started by 1495_sc, Mar 20, 2022.

  1. 1495_sc

    1495_sc Ton up Member

    Hello,

    Can someone please clarify the solution for few parts in this attempt?

    1. iii) b) Can this increase in expense be considered as a one off increase in expense and not the expected future expense level? If so, assets would reduce to reflect cash payment of expense. How can we distinguish between this one-off increase vs usual increase in expense with the wording of question?

    For required capital, an increase in future expense will increase BEL. As the required capital is calculated using standard formula, it is (unstressed net assets)-(stressed net assets). Net assets= assets- BEL. Hence, if BEL increases net assets will reduce and the required capital will reduce but the solution mentions that it will increase. Why so?

    c)

    How will BEL reduce in this case? Can we consider widening of credit spread leading to revoke of the matching adjustments? This widening of spread may lead to the insurance company changing its investment strategy to reduce risk exposure and hence the matching adjustment may not be permitted with the new asset-liability matching.

    Is there any relevant part of core reading for understanding this movement?

    d)

    For required capital, I understand that higher stress will be applied for default risk module and will increase stressed net assets but as the required capital= unstressed net assets- stressed net assets, how will the required capital still increase? Similar doubt as part b)

    2. v) How did we calculate estate distribution and maturity smoothing component? I followed the calculations for previous part of this question but could not understand the logic for these two components only. Also, are we assuming that estate is used for smoothing or is it implied anywhere in the question?

    vi) Can we also discuss how the WPA will look at the model for calculating reserve of with-profit policies? Whether appropriate data checks and assumptions are in place for the model to avoid possibility of under-reserving and protecting policyholders?

    vii) Apart from commenting about maturity, surrender, death, estate and expense, can we not comment about few items mentioned as method for with profits management of a closed block? For example- changing unit linked charges, need for a formal run-off plan, selling off the business to prevent large expense as the fund is declining, reviewing balance between terminal and reversionary bonus, etc.

    This attempt seemed to be hard overall although the questions were interesting.

    Thank you in advance!
     
  2. Em Francis

    Em Francis ActEd Tutor Staff Member

    An increase in BEL will reduce available capital but required capital will increase as the SCR will increase as the expense risk sub-module within the life underwriting risk module will increase. The SCR will increase as the proportionate stress will be made to a higher expense assumption.

    Credit spreads widening will reduce market value of bonds. If the increase in yields can be related to liquidity, then this may result in a higher matching adjustment being applied, resulting in a lower BEL. Yes ('potentially'), if the company changes its investment strategy then they may not get approval. However if the question states that an MA is applied then I would be considering impact on the MA, and therefore the liabilities, when going through the stresses.

    The course mentions matching adjustment impacts throughout.
    If the company lowers the credit rating then a higher default stress will be applied which will result in a higher SCR.

    This is provided in question, ie 5% of smoothed asset share (90% of unsmoothed) which results in a 10% smoothing cost.
    Potentially, however the question is specifically asking for what the WPA would need for the purpose of investigating whether the company is ‘treating customers fairly’ with respect to payouts. Thinking about how policyholders’ reasonable expectations are formed will help with structuring this solution.
    The company is still open to new business so you wouldn't want to focus too much on these points or make the point without recognising that it is still open. However, as NB is declining then you could mention some. For example, when managing the estate, they could consider declaring a special one-off bonus or closing to new business and running off the fund.
     
  3. 1495_sc

    1495_sc Ton up Member

    How will high liquidity due to increase in yield lead to a higher matching adjustment?
     
  4. 1495_sc

    1495_sc Ton up Member

    I didn't specifically understand the calculation of estate distribution and maturity smoothing component for estate analysis. Please help.
     
  5. Em Francis

    Em Francis ActEd Tutor Staff Member

    I think you are getting confused here, high liquidity will not be due to an increase in yield. The spread will compose of a liquidity component and a credit default component. The matching adjustment adjusts the discount rate for the former. Chapter 11 of the SA2 course notes describes the MA.
     

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