CA1 April 2012 Paper 2 Question 3 - Changing Valuation Methods

[Mendoza2909]

Hi,

I have a question about one of the past exam questions - April 2012 Paper 2 Question 3.

First of all, my answer hadn’t focused in on what they were looking for. I had written some quite general stuff about problems with Market Value as a method of valuation, and a bit about how using different bases for valuing A&L might lead to problems (which does appear in the answer).

However the answer as it appears in the examiner report talks a bit about risks inherent in contract design. It seems to me that these problems are not related to the change of basis, they would exist no matter what basis was used. Any tips on how to get the right focus for this and similar valuation method questions? It seems to me that unless the question is a very obvious ‘State the advantages/disadvantages of Market Value’ then the right focus is hard to find.

The answer to the second part of the question seems to take from a lot of different parts of the course, from types of Capital Model to discontinuance of DB schemes to investments - it's a tough one! There seems to be little indication of how broad the answer should be, although it is 8 marks I guess.

Thanks,

Colin

 

[Hemant Rupani]

That's really tough to view so broad.
When I try this Q.
I start with equality P=(B+e)×a_x
I see P& B remains constant. Now the risk is inherited to experiences,
1) Investment returns
2) expenses
3) longevity
4) reserving.
These 4 points are related to Valuation & reserving bases.

However, my answer was not so broad, But writing equality of any product and finding possible experience difference can give some important points.

 

[Helen Evans]

This is a demanding question, the Examiner's Report noted it was the least well answered question on the paper. For part (i), I would look to divide my answer in line with the key phrases in the question, ie use the key phrases as sub-headings, eg cover assets at mv, discount rate as risk free rate on bond, best estimate assumptions. We then need to link our answer to the product, hence why it seems contract design comes in but it's more in relation to how suitable this approach to valuation is, given we are selling annuities.

As you mention the number of marks in (ii) suggest a wide ranging answer needed, again it can be useful to pull out key words from question, ie look at advantages and difficulties, look at schemes and scheme members.

 

[Mendoza2909]

Thanks both of you, very helpful.

Colin