I have a question regarding the impact of an interest rate stress on the non-unit reserve under SII standard formula, and how this varies whether the reserve is positive or negative.
My understanding is that an interest rate rise would have no effect on charges, as they roll up and discount at the same rate. But expenses would be reduced as they are now discounted at a higher rate. So overall own funds would increase.
This seems to be the argument put forward in September 2018 Q1 vi: "Unit linked assets and unit liabilities are unaffected ......but projected charges may be higher as the yield curve increases ......this is offset by the increased discount rate .......but expenses are also discounted at a higher rate ......so own funds increase" . Here it looks like they have assumed a negative non-unit reserve but I'm not 100% clear on that.
However in September 21 Q1 ii they say the chosen SCR stress for interest rates would be upwards, and as part of their justification say: "for the UL business, the non-unit reserves are negative, and these will be discounted at a higher rate"
To me these seem contradictory. On one side it seems if you consider the cashflows separately, regardless of whether the NUR is positive or negative, if charges remain the same level and expenses are reduced then own funds would increase. However on the other I can see that if you took the cashflow as a whole (expenses less charges) and discounted it then the effect would depend on whether that cashflow is positive or negative.
I'd appreciate any guidance on how the impact of an interest range change is calculated for a non-unit reserve and why these answers are set out differently.
Thanks!
My understanding is that an interest rate rise would have no effect on charges, as they roll up and discount at the same rate. But expenses would be reduced as they are now discounted at a higher rate. So overall own funds would increase.
This seems to be the argument put forward in September 2018 Q1 vi: "Unit linked assets and unit liabilities are unaffected ......but projected charges may be higher as the yield curve increases ......this is offset by the increased discount rate .......but expenses are also discounted at a higher rate ......so own funds increase" . Here it looks like they have assumed a negative non-unit reserve but I'm not 100% clear on that.
However in September 21 Q1 ii they say the chosen SCR stress for interest rates would be upwards, and as part of their justification say: "for the UL business, the non-unit reserves are negative, and these will be discounted at a higher rate"
To me these seem contradictory. On one side it seems if you consider the cashflows separately, regardless of whether the NUR is positive or negative, if charges remain the same level and expenses are reduced then own funds would increase. However on the other I can see that if you took the cashflow as a whole (expenses less charges) and discounted it then the effect would depend on whether that cashflow is positive or negative.
I'd appreciate any guidance on how the impact of an interest range change is calculated for a non-unit reserve and why these answers are set out differently.
Thanks!