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Sept 2021 Q1 (iii)

A

Aditi

Keen member
Hi,

Can someone explain how the undiversified SCR component decreases when the market value of property falls by around 25%?

Shouldn't it be other way round? The company has invested in property and the market value decreases. This will lead to increase in risk for the company as there will be mismatch and thus SCR component for property risk increase and not decrease.
 
If the market value of property falls by 25%, we now have only 75% of the value of property that we had before. Therefore our exposure to another market value fall of 25% has decreased in absolute terms.
 
With the fall in market value of property, wouldn't our stressed BEL increase? and with decrease in stressed asset and increase in stressed liability, the undiversified SCR should increase.

Is my understanding correct?
 
Why would the fall in property values have any impact on the BEL? The BEL for without-profits business would not be impacted by this, as that depends only on risk-free rates. And the question states that the UL business is invested purely in equities.
 
Hi,

I'm not sure I understand the examiners report for the interest rate. If the risk-free interest has fallen, the value of the fixed-interest assets would increase (so the assets backing the immediate annuity and term assurance BEL). So would that not reduce the SCR so the stress is decreasing?
 
And for mortality, I understand that there are less policies in force due to more deaths across products so the stress would decrease.
But does it also not mean the company is more at risk of mortality so should the stress not increase?
 
Lindsay Smitherman said:
Why would the fall in property values have any impact on the BEL? The BEL for without-profits business would not be impacted by this, as that depends only on risk-free rates. And the question states that the UL business is invested purely in equities.
Click to expand...

In Q1, part ii), it states the adverse direction to be stressed when calculating SCR for equity and property is down. whereas in part iii) when the property values drops, the property risk SCR component decreases. Dont these two statement contradict one another. Can you please explain where am i going wrong?
 
I think the thought is -
in this scenario the impact will be only on the own funds since the property as an asset doesn't back any products - so likewise no impact on BEL.
If the value of the property drops, the NAV on both the non-stressed and stressed balance sheet will drop - because like Lindsay had mentioned before the exposure to property has gone down as well - so firstly the amount of property in our portfolio has gone down by 25% anyway; plus secondly when looking it at from NAV point of view - assets under non-stressed BS has already gone down and with the stressed the value will drop too - the difference however (Which is the SCR) may not widen, but reduce slightly because total exposure to the asset has reduced.
Have I got it somewhat in tune with what the idea is?
 
AKS01 said:
Hi,

I'm not sure I understand the examiners report for the interest rate. If the risk-free interest has fallen, the value of the fixed-interest assets would increase (so the assets backing the immediate annuity and term assurance BEL). So would that not reduce the SCR so the stress is decreasing?
Click to expand...

Interest rate down means value of fixed-interest assets up (as you say)
If the SCR stress involves a change in the value of fixed-interest assets of x%, say, then the absolute value of this stress will have increased because you have a higher value to apply the x% to
In other words: you have more fixed-interest asset value to lose under the adverse stress now
 
AKS01 said:
And for mortality, I understand that there are less policies in force due to more deaths across products so the stress would decrease.
But does it also not mean the company is more at risk of mortality so should the stress not increase?
Click to expand...
No: less risk of mortality. Fewer policies in-force, so fewer people would die if a mortality event of x% extra deaths occurred.
 
Ekta Mehta said:
I think the thought is -
in this scenario the impact will be only on the own funds since the property as an asset doesn't back any products - so likewise no impact on BEL.
If the value of the property drops, the NAV on both the non-stressed and stressed balance sheet will drop - because like Lindsay had mentioned before the exposure to property has gone down as well - so firstly the amount of property in our portfolio has gone down by 25% anyway; plus secondly when looking it at from NAV point of view - assets under non-stressed BS has already gone down and with the stressed the value will drop too - the difference however (Which is the SCR) may not widen, but reduce slightly because total exposure to the asset has reduced.
Have I got it somewhat in tune with what the idea is?
Click to expand...
Yes! :)
 
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