April 2013 Q1 part (i) & (ii)

[smSA2]

Please can you confirm whether the following approach to Q1(i) is correct?
Liabilities at start of year = £5.2m
Assets at start of year = £5.2m
Surplus at start of year = zero

Liabilities at end of year = £5.2m * 1.03= £5.356m
Assets at end of year = £5.2m + £5.2m * 14*(7%-6%) = £5.928m

Surplus during 2012 = £5.928 - £5.356m = £572,000

The question says, "The company sold £1m of new business premiums, which resulted in a Pillar 1 loss of £50,000 (measured as at the end of 2012)". The amount of new business annuities payments have not been provided.

Does anyone have view on what assumptions should be made about annuity payments for new business and whether this needs to be incorporated in the answer to part (i)?

For part (ii), can we use the formulas given in the course notes?

 

[Mark Willder]

Please can you confirm whether the following approach to Q1(i) is correct?
Liabilities at start of year = £5.2m
Assets at start of year = £5.2m
Surplus at start of year = zero

Liabilities at end of year = £5.2m * 1.03= £5.356m
Assets at end of year = £5.2m + £5.2m * 14*(7%-6%) = £5.928m

Surplus during 2012 = £5.928 - £5.356m = £572,000

I'm afraid these figures are not correct. For example, you need to allow for the cashflows paid during the year in both the liability and asset calculations.

You can check out the full solution in the Examiners' Report on the profession's website or in our ASET.

The question says, "The company sold £1m of new business premiums, which resulted in a Pillar 1 loss of £50,000 (measured as at the end of 2012)". The amount of new business annuities payments have not been provided.

Does anyone have view on what assumptions should be made about annuity payments for new business and whether this needs to be incorporated in the answer to part (i)?

You don't need to know the annuity amounts for the new business. We just knock 50,000 off the surplus arising to reflect the impact of new business.

For part (ii), can we use the formulas given in the course notes?

Unfortunately the formulae in the course notes aren't very useful here. For example, we know that the mortality and expense surplus are both zero, and that the new business surplus is a loss of 50,000.

The solution goes into great detail breaking down the investment surplus into all its component parts, eg the widening credit spread. The formula in the Core Reading is too simplistic for this.

However, the general principles are the same - you need to change each element from actual to expected one by one and look at how it changes the asset and liability values.

ASET gives lots of advice on how to do this.

Best wishes

Mark

 

[almost_there]

How well did people do in this question? I suspect not very well at all given that it's using a recursive relationship from subject CT5 !!
There are not many numerical examples to practice for this or the April 2008 question

 

[Em Francis]

How well did people do in this question? I suspect not very well at all given that it's using a recursive relationship from subject CT5 !!
There are not many numerical examples to practice for this or the April 2008 question

Hi

There are past exam questions on analysis of surplus or of change in EV you can try. Please see page 8 of the attached.
Thanks
Em