Hi Alterations For an alteration, how is determined if this is supported by the asset share (i assume this at a policy level). Is an SV for said policy counted, and the value of alteration cannot exceed this? As a premium reduces to 0 for a boundary condition, is it for endowments where would expect the SA to reduce towards the SA applicable if no premiums were being paid (i.e. paidup). I assume for term assurances, the SA would towards to zero as, no premiums would result in a lapse of cover? April 2020 Q3 Value @ risk for SCR When we define this as the min required confidence level over a period of time i.e. 99.5% over 1 year. Is this 99.5% confident that the level of shocks will not occur, or that the SCR will not exceed the calculated value. I have an element of confusion (from a past paper) regarding the steps following the SCR calculation Balance sheet is re-stated under each shock Surplus is then re-calculated and discounted back to zero Surely these should be the other way round, as you require the surplus from each shock to calculate the balance sheet? Sept 2018 Q2 Revalorisation with profits method Under this method the reserve, SA and prem the policyholder pays is increased by factor k. How is this equitable/fair to the policyholder, as they essentially have to pay more premium for the bonus they receive? whereas addition to benefits can be new units or additions to SA (with no increase in prem i assume? Contribution method I was unable to understand why cash dividends under this method were undesirable if a policyholder was able to withdraw during the contract Addition to benefits Why would bonuses be based on premiums paid to date. I thought this was based on asset share April 2021 Q9 Part iv). I understand how they derived the 12.5. However why isnt this same methodology applicable to valuing option B, whereas they have just taken the value of the new policy, rather than finding the difference between the policies with different SAs with a 10 year duration April 2017 Q2 Illiquidity premium Is this an adjustment made after reserves are calculated? Or is this accounted for in the discount rate that is used to discount during the liability valuation Does this essentially offset the deduction for credit risk made to the risk free rate What is meant by that the illiquidity premium is the corp - gilt bond yield that is not compensation for the increased credit risk. How is the portion responsible increase in risk and the illiquidity prem split out Thanks Kiran
Hi Kiran I'll split replies over several posts ... It's up to an individual company if and how they choose to implement this principle of being supported by asset share in practice. So, there may be some approximation (eg of asset share calculations) and use of sample policies. It's not the SV for a policy that is counted, it is the asset share. Think about the equating policy values approach to alterations : if we take the value of the original policy as its asset share, then at the alteration date we need the present value of the newly altered contract to not exceed this. Yes
It's the latter. This is the right way round. You are right though that it is circular (need the balance sheet to calculate the surplus from each shock, need the surplus from each shock to calculate the balance sheet). So, the practical implementation of this method (not needed fro SP2) requires some numerical method or approx to deal with this circularity.
Short answer: because the premium increase only applies to future premiums (not all the past premiums the policyholder has already paid). Longer answer: Chapter 7, Section 1 answers this question. The question says policyholders can 'take withdrawals' so presumably has the flexibility to withdraw part of the value of the policy at regular intervals (not just withdraw once as in surrender). With this feature already available, no need to get regular cash bonuses too. It's not so much how the bonus rates are calculated, but more that the way bonuses are expressed to the customer is that they are based on the premiums paid.
Last one! Note the comment from the examiners : 'Marks were also given where candidates made alternative sensible use of the premium rates/sums assured shown in the question.' Presumably was ok to do something different to what it is shown in either case. In the discount rate used to discount cashflows in the liability valuation. Be careful here : the deduction for credit risk is not made from the risk-free rate. The deduction for credit risk is made from observed government bond yields or swap rates in order to determine the risk-free rate. If the conditions to apply an illiquidity premium are met, the illiquidity premium is then added to the risk-free rate. We can picture the spread or difference between corporate and government bond yields as being due to (1) the higher credit risk and (2) the lower liquidity of corporate bonds. How the spread is divided into these two portions is the subject of debate / differences in approach in practice. Happily for SP2 we don't need to worry about how this is done. It may well not be each individual insurance company that needs to do this - the regulator may specify the portion of the spread. (This is what happens under Solvency II.) Hope these help! Lynn
