Hi, can you kindly explain what this means on page 8? “A lower than assumed average policy size may reduce the absolute amount of loadings received towards the per-policy expenses, whereas the per-policy expenses themselves (by definition) would not be so affected.”
Hi Kimiko Let's say that the per policy expenses are 20 and we think the average policy size is 10,000. Then we might charge 2 per 1,000 sum assured for expenses. If policies are on average only 8,000 in size then we only receive 8 x 2 = 16 for expenses. So a lower than assumed average policy size reduces the absolute size of the loadings (we get 16 instead of 20) but does not affect the per policy expenses themselves (which are still 20). Best wishes Mark
Thank you, Mark. Can you kindly help me understand this in the solution to Practice Question 29.3: "Investing short leaves company exposed to interest rate fall. Investing long leaves company exposed to interest rate rise."
The longer the term of the cashflow the bigger the impact of a change in interest rates. Higher interest rates lead to lower values.
Hi Kimiko Have a go at explaining this yourself. What do you think will happen to the liabilities? What do you think will happen to the assets?
Okay let me try, if the company invests short and interest rates fall: - assets have shorter term than the liabilities - assets and liabilities are both valued higher but since the company invested short, the value of liabilities is unexpectedly higher than the assets If the company invests long and interest rates increase: - assets are valued lower which may not be enough to cover the liabilities at the time and the company won't be able to make any changes since it invested long Seems like my understanding is not really there for this.
Thank you so much Mark, that makes me very happy! Are those all the points that I could have made? I feel like there could be more.
No, that's it. You have all the key points there. Just remember to break the question down into its components - in this case the asset and liabilities.
