September 2022

Thanks.

1. If the asset duration is increased, although the payout period is increased, doesn't the payout itself reduce so that the PV is still the same? Example, say 5% interest 10-year bond of 1000 would give roughly 50 per year and if the duration is increased to 20-years then the bond interest would halve to 2.5%? My point is that the initial invest of 1000 would remain just the duration is being increased and this might result in lower payouts to match liabilities. Or am I missing something here?

2. How does the available capital impact the required capital? If I look from a calculation point of the required capital, say of SCR, my understaning is that its derived by stressting the risk driver which usually would be claims. So where does the available capital come into the overall picture here?

 

What about the matching concept though? Although the PV of assets = PV of liab, the expected liab outflow should also be matched by asset at each duration, isn't it? And with longer duration, the asset income available at each duration reduces, isn't it?

 

Hi there,

When the cost of life cover is charged to the inforce asset shares, the overall CoG increase because the asset share at claim will now be lower than the guarantee at the point of claim. Does this increase in the overall guarantee lead to a further CoG charge to the asset shares?
I am trying to understand the relationship between the CoG that must be deducted from AS or estate (if AS< guarantee) and the charge to the asset shares for CoG. Please could this be explained?

Thank you!

 

Regarding counterparty risk- will this not be higher for Country A as it is reinsuring its liabilities? Or would it be same for both countries? This seems like a very high level comment as I believe that both countries will be exposed to internal default risk.

 

Q1. iii) Why interest rate risk is future yields being lower than expected? The increase in BEL would be offset by the increase in assets. I thought it might be there other way around ie rise in future yields would reduce the BEL but reduce the assets more assuming there will be some assets as part of own funds. And in part v) it is mentioned that the interest risk is lower in B because of lower rates, so both statements sound conflicting.

In general, I am not able to follow the impact of interest rate and credit spread risks on SCR magnitude as well as in what direction the stress should be applied. If possible, a simple example will help.

 

The examiner remark says Q1. "(vi) This was answered best by candidates that recognised that the risk margin only covers non-hedgeable risks and that the reduction in interest rate would reduce the discounted value."

How would reduction in interest rate reduce the discounted value? is it a typo?