There was a question on the effect of a recent equity crash. When discussing how a drop in value of equities affects the RCM the answer says the RCM equity stress is likely to reduce as it is based on the equity values over a previous period rather than just the current.(But it still takes account of current??) I dont fully understand this. This part of the RCM is a market stress. So if the value of equities in Peak 2 has fallen surely the gtees, cost of smoothing etc are likely to be more onerous?? Increasing the RCM!?? What am I missing here? Cheers!
Yes, the past fall in equity values will have made the cost of guarantees and smoothing more onerous. But this will show up in an increase to the future policy related liabilities. The RCM is a forward looking test, so we need to consider what we now expect to happen in the future. The relevant stress test under the RCM is a fall or rise in the market value of equities of at least 10% and no more than 20%, depending on the average level of the FTSE All Share Index over the previous 90 days relative to its current level (this is what the Examiner's Report is referring to when it mentionsequity values over a previous period). The 90-day rule was designed to provide some stability in falling markets and as a result the required further fall to be considered under this stress is likely to be lower than before. So the RCM is likely to be lower then before. Best wishes Mark
