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Sept 2018 Q1 vi - interest rate increase

R

Retrieva

Active Member
Hi
The exam report says "Unit linked assets and unit liabilities are unaffected" by an increase in interest rates in the base position.
a - Is this only true for this particular question because it says "unit-linked liabilities are invested in a
mixture of equities and property"?
b - If the question hadn't said unit funds only have equities and property, would it have been correct for the answer to say unit-linked assets and liabilities would decrease in base due to lower market value of fixed interest assets held in unit funds, and this would decrease charges less expenses going forwards, with a positive impact on non-unit BEL - ie higher absolute value of negative BEL - and lower own funds?
 
Retrieva said:
Hi
The exam report says "Unit linked assets and unit liabilities are unaffected" by an increase in interest rates in the base position.
a - Is this only true for this particular question because it says "unit-linked liabilities are invested in a
mixture of equities and property"?
b - If the question hadn't said unit funds only have equities and property, would it have been correct for the answer to say unit-linked assets and liabilities would decrease in base due to lower market value of fixed interest assets held in unit funds, and this would decrease charges less expenses going forwards, with a positive impact on non-unit BEL - ie higher absolute value of negative BEL - and lower own funds?
Click to expand...

Correction for the last sentence: "- ie lower absolute value of negative BEL -"
 
Query on above-

1. If UL is linked to equities and property, then interest rate up wont have an impact on UL asset & reserves.

However, wouldnt it impact non-UL reserves? Interest rate increase would increase projection of UL fund value as risk-free rate is used for projections. And so, charges would correspondingly increase if they are linked to fund. And so, when charges and expenses (some %fixed) are discounted at higher rate, negative non-UL BEL would increase in absolule terms? So overall BEL (UL+ non UL) reduces?

If charges were fixed monetary, then negative non-UL BEL reduces as PV of charges may be lower than PV of future expenses and overall BEL may increaese?
 
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