Q1 part v. 1. Could you please elaborate the impact of interest rate risk as given in solution? Shouldn't it talk about matching. Country A assets are matched and interest rate risk will be less. However, we are not sure about assets backing the Liabilities in country B. 2. Why counterparty risk will be high in country B? 3. For equities, we are not sure if there are any investment made by company in country B. So shouldn't we mention something?
The scenario involves the company (in Country A) reinsuring all its annuity liabilities to its new subsidiary in Country B. 1. The co will have to pay a premium into the new subsidiary in order to undertake this reinsurance (broadly equal to the liabilities being reinsured), and to achieve this it would probably just transfer the existing backing assets into the subsidiary. So the annuities would still be matched. 2. Because there is now a reinsurance arrangement in place. (The risk probably wouldn't be 'high', but it is a risk that wouldn't exist if the business just stayed in Country A.) 3. Part (v) is only asking about the annuities, and these would not be backed by equities.
