Apr 24 Q1 iv)

[Actuary@22]

Hi

Please explain in Q-1 iv) in the examiner's report what the following paragraph is trying to say? What is meant by whom takes the risk and holds capital here?
Since policies are being converted to without profit so risk is with the shareholders right as the benefits are certain?
"
Who takes the risk and holds the capital?
[1]
Likely to be shareholders else cannot distribute the estate fully
[1]
Or perhaps transfer to the with-profits fund
[½]
But compensation for the cost of capital will still need to be factored in
[½]
In either case there needs to be a fair charge for the capital.
[1]
There may be a conflict of interest between Shareholders who take the risk and policyholders who pay the charge"

 

[Mark Willder]

Hi

Please explain in Q-1 iv) in the examiner's report what the following paragraph is trying to say? What is meant by whom takes the risk and holds capital here?
Since policies are being converted to without profit so risk is with the shareholders right as the benefits are certain?
"
Who takes the risk and holds the capital?
[1]
Likely to be shareholders else cannot distribute the estate fully
[1]
Or perhaps transfer to the with-profits fund
[½]
But compensation for the cost of capital will still need to be factored in
[½]
In either case there needs to be a fair charge for the capital.
[1]
There may be a conflict of interest between Shareholders who take the risk and policyholders who pay the charge"

Hi

Yes, the most likely scenario is that the shareholders will provide the capital.

However, it is possible for without-profits business to be written in a with-profits fund (such as fund A or B). In this case the capital would be provided, at least partly, by the with-profits policyholders in the fund the business is transferred to.

Best wishes

Mark

 

[Actuary@22]

Okay so what does who takes the risk mean in this context?

 

[Mark Willder]

Okay so what does who takes the risk mean in this context?

The examiners are saying that we need to decide who will take the risk (half mark), they then suggest that it is probably the shareholders (half a mark) and then they say that instead it could be the with-profits fund (half a mark).