Is it just me, or did there seem to be a screw up in this question? Of the three contract designs presented (original, design A and design B), only design A had capital units - the others were just accumulation with varying allocation rates. So why did part ii) of the question ask whether actuarial funding would be useful for Design B allocating 8 marks, when the answer is simply "no - the contract design is not compatible, but it would be useful in Design A". Surely the question that should of been asked was "Would actuarial funding be appropriate for Design A?" - you can then spend 8 marks talking about the effects on the cost of capital, matching of expenses to costs, need to adjust surrender values - all stuff that's in the notes. Plus it is suspicious that the order of the contract descriptions was original, design A, design B. Did the person setting the question get thrown by the order and think that the second contract in the list was Design B when they meant Design A? What did other people think...........???
Yea you are correct that design A was more suitable for Actuarial Funding. I think the examiners were expecting a detailed answer for part 2 by asking why not Actuarial funding is suitable for design B - Remember we are replying to a "Finance Director so we need to explain every bits of Actuarial Funding here and then say why Design B is not suitable and also why it doesnt require Actuarial Funding.Also perhaps mention that design A is more suitable. - This should carry more than 8 marks in my opinion. Also the surrender term for both designs are ok for Actuarial Funidng. Otherwise what you think of the paper? I thaught it was too long with too much reading!!!
Yes I thought this was a strange question too so I left it till last. I just ended up listing why design B was and wasn't suitable and hoped for the best. I was also unsure what kind of thing they were looking for on the question about internal and extrenal funds - I found myself waffling a bit on this one.
