1. In the Question 1 of Oct 2012 exam, it is mentioned that the with profits BEL can be measured as asset share (retrospective) + stochastically generated value of cost of guarantee . But in Solvency II directive it is said the the valuation of guaranteed and discretionary benefits should be unbundled, which I think implies a prospective valuation. Are both methods acceptable under the current Solvency II development? 2. What is the difference between interest rate risk sub-module and spread risk sub-module in the standard formula for calculating SCR? Can someone pls help answer the above? Many thanks in advance!
Only question 2 is discussed here, can someone have a look at 1 please? 2. Interest rate risk is the adverse impact due to changes to the level or shape of interest rate. E.g. fall in interest rate increases the liability to guaranteed annuity option. Spread is the yield of corporate bonds less gilts. Increase to the spread decreases the value of corporate bonds, and liabilities might not be met due to falling assets. The spread mainly comes from credit risk and illiquidity of corporate bonds. Hope this helps!
