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A few small questions

N

N_Exam

Very Active Member
Hi everyone,

I have a few small questions. Please could forum members and tutors help

Q1) I understand the theory of risk budgeting. Please could someone give a few real life examples of where its used. It all seems too theoretical to me at this point.

Q2) Please let me know if the below are correct. Please correct them is they are not.

"Cost of Capital" is the cost of borrowing for a company. Is it also the opportunity cost of say using the capital for one project and not another?

"New Business Strain" is the reserving amount for a newly sold product. As the premiums for the product come into the company, the new business strain reduces as the reserves required for the product payout are recouped. "Expenses to set up a policy" is not the new business strain.

"Capital Strain". I am not sure what this is?

Q3) I think a company's profit or a pensions surplus is the "assets - liabilities". I'm not sure how these "assets" and "liabilities" are calculated. Are they a present value, having discounted their future cashflows? or is it just the current "asset" and "liability" value.

Q4) In an exam question, should I consider that "building a model" is different to "Designing a model". Building a model is building it from the ground up whereas for designing a model I would use "scarcer files".

Q5) I have done an exam question on a policy that has no underwriting and a maximum premium. If a policy has no underwriting and a guaranteed maximum premium does this mean all policyholders are charged this maximum premium or otherwise?

Q6) The "Discuss" command verb. Some exam model solutions give pros and cons in a discuss question. In other cases they just give only pros or cons. I'm slightly confused on whether I should always give pros and cons to a "discuss" question - don't want to waste time listing (say) cons if there are no marks for it.


Thank you :)
 
Q1) Risk budgeting could be applied in all types of investment scenarios, eg the assets of a pension scheme, life insurance company or any type of investment fund.

Q2) You are correct re the cost of capital… it might be the cost of borrowing, eg if a loan is needed for the capital. But even if a loan is not needed, the capital needed to support business in force or for provisions is likely to be restricted in terms of what can be done with it, or what it can be invested in. This reduction in investment return, ie the opportunity cost, is also seen as the cost of capital.

Q3) New business strain is not just due to reserves… it does take into account expenses too. As per the notes (Chapter 6 Section 1.6): Usually, in the first month of a life insurance contract, the insurer receives a premium, but has to pay out commission, initial administration and underwriting expenses, set up provisions and any required solvency capital. If the outgo is more than the income, this is called new business strain.

Capital strain and new business strain are often used interchangeably. The term capital strain is also used because when the initial expenses and reserving requirements cannot be covered by the first premium, the insurer must use capital to cover the difference.

Q4) SCARCER FILES is about model design, but the design of a model is important to consider when building a model, so there might be a lot of overlap here. An important skill for CP1 is to be able to provide a broad answer, and so it might be the case that you can use multiple topics and acronyms to help you generate enough different and sensible ideas for a given question, rather than saying one acronym/topic is always for one type of question and another acronym is for another.

Q5) Please provide further details of the question that you looked at.

Q6) Discuss means that we need to take into account different points of view (see link below). As you say, this often translates into meaning pros and cons, as there will often be positive and negative points of view. So my advice would be to talk about advantages and disadvantages, assuming you think there are both.

https://www.actuaries.org.uk/studyi...and-verbs-used-associate-and-fellowship-exams
 
Hi Richie, Thank you for your post :)

In reply:-

Q5) I believe UW means that each policyholder (of same age) is charged the same premium for the same payout (Sum assured).
I have done an exam question on a policy that has no underwriting and a guaranteed maximum premium. I am unsure how this g'teed max. premium would come into play for this policy? If a policy has no underwriting and a guaranteed maximum premium does this mean all policyholders are charged this maximum premium or otherwise?
The exam question is April 2013, Paper 1, Question 6.

Q3) I think a company's profit or a pensions surplus is the "assets - liabilities". I'm not sure how these "assets" and "liabilities" are calculated. Are they a present value, having discounted their future cashflows? or is it just the current "asset" and "liability" value (value done by one of Sham Fads).

Q6) Terminology question (I don't want to get my "signs" mixed up):
A person having a high mortality means they are likely to die quicker than someone with low mortality.
For Longevity, is a person with high longevity likely to live longer than someone with low? So high longevity is opposite of high mortality?

Thank you:)
 
N_Exam said:
Q5) I believe UW means that each policyholder (of same age) is charged the same premium for the same payout (Sum assured).
I have done an exam question on a policy that has no underwriting and a guaranteed maximum premium. I am unsure how this g'teed max. premium would come into play for this policy? If a policy has no underwriting and a guaranteed maximum premium does this mean all policyholders are charged this maximum premium or otherwise?
The exam question is April 2013, Paper 1, Question 6.
Click to expand...

This question refers to a situation where the p/h can opt to extend their cover beyond an initial chosen term without further underwriting (ie a renewable term assurance), after which point the premiums are regularly reviewable: so the rates are not known in advance.

There being no further underwriting means no further health checks. The p/h would still be charged a premium rate that reflects their age at that point - it just wouldn't be loaded up for any health issues that they have developed during the initial term.

The maximum premium rate is there in order to provide reassurance to the p/hs that the insurers wouldn't increase that rate to something significantly higher at the renewal point (given that the rates are not guaranteed).
 
N_Exam said:
Q3) I think a company's profit or a pensions surplus is the "assets - liabilities". I'm not sure how these "assets" and "liabilities" are calculated. Are they a present value, having discounted their future cashflows? or is it just the current "asset" and "liability" value (value done by one of Sham Fads).
Click to expand...

Assets - liabilities = surplus
Insurance company profit = change in surplus over period

Assets & liabs would be valued however the company / scheme chooses to do so (if the assessment is for internal purposes) or however they are required to do so (if the assessment is for regulatory / legislative purposes).

Liabilities would typically valued using a discounted cashflow technique (although could use an arbitrage valuation method) and yes, assets could be valued at market value, fair value, smoothed asset value, etc etc - whatever is appropriate for the purpose.
 
N_Exam said:
Q6) Terminology question (I don't want to get my "signs" mixed up):
A person having a high mortality means they are likely to die quicker than someone with low mortality.
For Longevity, is a person with high longevity likely to live longer than someone with low? So high longevity is opposite of high mortality?
Click to expand...

Yes, although would tend to use the words 'high' and 'low' when referring explicitly to rates (or to expectations of life - ie something numeric rather than conceptual). Experiencing high mortality rates means dying earlier. Experiencing high longevity rates means living longer.
 
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