S
scarlets
Member
The question and answer for Q&A bank 2.3 (ii) makes no sense to me. Please explain what section of the notes it is referring to & what this question is trying to get us to understand.
The question and answer for Q&A bank 2.3 (ii) makes no sense to me. Please explain what section of the notes it is referring to & what this question is trying to get us to understand.
For Q&A 2.4, again what material is this based on? I ask as with a cut-down discussion on the regime before S2 I'm not sure the material left in the notes helps us to answer a question as detailed as this. Same comments for Q&A 2.8 (i) & (ii)
I don't quite understand why matching a without-profit liability with an equity rather than a bond means the valuation rate of interest reduces? Doesn't this mean you need more equities to match a without profit liability than you would if you had bonds? Doesn't make sense to me, as equities have better expected return. Confusing.
This is reasonable given the cautious nature of the FSA returns. By holding a high market value of equities the policyholders are protected to some extent from a fall in equity values.
Yes, some material has been cut on the FSA solvency regime, although the missing material is not relevant to these questions.
Both of these questions look at how to perform valuations, in particular the monitoring process and assumptions required. Hopefully you can have a reasonable bash at these questions using your knowledge of ST2. However, we return to the topic of assumption setting in Chapter 28.
Also when stock markets crash aren't companies supposed to sell equities and buy bonds.
Confusing.
For a company, then to back a liability to be given a choice to hold less in bonds or more in equities then surely it's a no-brainer to hold more equity if you can. Then why bother holding any government bonds unless you had to.
How can this be good for policyholders given the more volatile nature of equities? Surely policyholders are better protected with a company that holds mostly govt bonds compared to a company holding mostly equities.
And why diversify your equity holding anyway. If you buy equities in company X with a very high default risk, then you do your risk-adjusted thing meaning you can hold even more of it. This would seem to encourage companies to hold more risky assets.
Also when stock markets crash aren't companies supposed to sell equities and buy bonds.
Confusing.
Say a liability can be backed by equities worth 150 or bonds worth 120, say.
Currently you hold the 120 bonds. Then you decide that's too boring, not enough return for shareholders. So you sell 120 bonds and buy 150 worth of equities.
How can you then say this is equivalent protection for policyholders as you've had to take 30 from company free assets to buy the more volatile equities. Surely that is less security for policyholders as your free asset ratio is damaged & investments backing their liabilities are more volatile.
For S2, the notes say you discount liability cash-flows with risk-free rate (allowing for illiquidity premium). No adjustments there for whether you back that asset with an equity or a bond (apart from illiquidity adj?)
Doesn't S2 mean less protection compared to old regime? As if the risk-free rate is 4% say and dividend yield is 2% then under S2 you would discount at higher rate hence lower reserves?