Hi, On Q1 (iii), one of the suggestions to reduce longevity exposure was to change the standard annuity product from without-profits to with-profits. I'm not sure I fully understand the reasoning for this suggestion - Would someone be able to explain please? Thanks
By selling as a with-profits policy in a 90:10 with-profits fund, for example, the longevity risk will be shared between policy and company 90:10.
For Q3 (ii) it states that the change in credit spreads is a component of the SCR standard formula calculation as part of the risk module. If credit spreads widen would that mean the SCR increases?
Yes, as bond values will fall and (if there is no matching adjustment), the value of the BEL will remain unchanged, and so the net assets will fall, creating an SCR.
We need to be careful here - it is really important not to confuse the SCR stress itself with the impact on the SCR of an event happening. Both types of question have been asked in the exam. The SCR calculation would involve using an assumed stress event = credit spread widening, and this would create an SCR component as Em mentions above. However, if credit spreads actually widen, the value of corporate bonds will fall. Consequently, a newly calculated credit spread SCR component would likely decrease (since there is now a lower value of corporate bonds to lose once the stress is applied to the new value).
Can you explain further on what you mean when you say not to confuse with SCR stress itself with the impact on the SCR of an event happening with an example if possible.
SCR stress itself: Propose, with reasons, which direction the risks listed in part (i) are likely to be stressed when calculating the SCR (Sept 2021 Q1 part (ii)) Assumed property market extreme fall -> positive SCR component for property market risk Impact of an event on the SCR: Determine how the magnitude of the undiversified SCRs might have changed as a result of events that have happened over the year. (Sept 2021 Q1 part (iii) - paraphrased) Actual property market fall -> lower SCR component for property market risk
