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Question: A 40% drop of the equity market value, which used to back the with-profit fund. Asked to analysis the impact on Pillar I balance sheet.
In the Examiner's Report, it is said that "the equity stress to be applied in RCM is likely to be reduced, since the stress will be based on the average level of equity markets over a previous period rather than just on the current low level. However, there could be some offset from a higher volatility assumption."
I don't really understand the explanation here. If the equity stress were to be reduced, shouldn't it be because that the stress is applied on a lower current level, or say lower average level? Also, how can it be offset by a higher volatility assumption?
Many thanks!
In the Examiner's Report, it is said that "the equity stress to be applied in RCM is likely to be reduced, since the stress will be based on the average level of equity markets over a previous period rather than just on the current low level. However, there could be some offset from a higher volatility assumption."
I don't really understand the explanation here. If the equity stress were to be reduced, shouldn't it be because that the stress is applied on a lower current level, or say lower average level? Also, how can it be offset by a higher volatility assumption?
Many thanks!