April 2012 Q2

Discussion in 'SA2' started by SABeauty, Apr 6, 2013.

  1. SABeauty

    SABeauty Member

    For part i


    There is a money back guarantee on 10th policy anniversary of initial single premium if this is higher than the current unit price.

    The exam solution says that the non unit liabilities would be calculated using projected cash flows;

    Additional benefit payable under money back guarantee

    Plus guarantee cost which is the greater of 0 and premium less value of fund on tenth anniversary

    What is the difference? Wouldn't the guarantee cost be the additional benefit payable? Why are they adding these components and how do they differ?
     
    SABeauty, Apr 6, 2013
    #1
  2. dok87

    dok87 Member

    Yes, I have also been thinking about this. I convinced myself there is double counting in the Non-Unit Liabilities. I think the un-bundling should be:


    • Unit liabilities is as per the unit fund value
    • The non-unit long-term Policyholder liabilities should be the Market-Consistent cost of the money-back guarantee (i.e. the Cost of Guarantee) - which may over and above the unit fund (at year 10) hence met by shareholders via the non-unit fund

    Could it be poorly worded "Intrinsic Value + Time Value" of the market-consistent cost? .....a long short!... lets see what other folk think.
     
    Last edited by a moderator: Apr 7, 2013
    dok87, Apr 7, 2013
    #2
  3. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    It looks like double counting in the examiners report to me too. In ASET we only mention the guarantee once and have:

    The non-unit-related liabilities should be calculated by discounting the projected non-unit cashflows. These are given by:
    • expenses
    • plus death benefits paid in excess of unit fund, ie 1% of the value of units at the time of claim
    • plus the cost of the money back guarantee, ie the excess of the premium over the value of units (subject to a minimum of zero) for surrenders occurring on the tenth policy anniversary
    • less the charges, ie fixed annual management charge of 1% plus the guarantee charge of % pa varying by fund
    • less surrender penalties for the first five years.

    We later explain how to value the guarantee using option pricing techniques.

    Best wishes

    Mark
     
    Mark Willder, Apr 8, 2013
    #3

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