Sp2 April 2021Q9 part 2

[Twinan]

It says ‘assets- reserves will be minimal likely backed by fixed interest assets. Interest rates rising since 2011 such that higher returns earned on investments’.

If interest rate rises, we lose out higher coupon payment as existing fixed interest assets still pay fixed nominal. How does it earn higher returns?

 

[Mark Willder]

It says ‘assets- reserves will be minimal likely backed by fixed interest assets. Interest rates rising since 2011 such that higher returns earned on investments’.

If interest rate rises, we lose out higher coupon payment as existing fixed interest assets still pay fixed nominal. How does it earn higher returns?

Hi Twinan

The question is looking at pricing term assurances in 2011 and 2021. In 2011 the insurer buys bonds at a low interest rate and so premiums are expensive. In 2021 the insurer buys bonds at a higher interest rate and so premiums are cheaper.

Best wishes

Mark