I've just had a couple of errors pointed out in revision book 4. Thanks to Clare for spotting these. First of all, the answers for the core reading questions are out of sync for question 51 onwards (answer for 51 is contained within answer for 50, and then the answer to question 52 is answer 51... 103 questions, 102 answers). Secondly the solution to past exam question 13 (Subject 302 September 2004 Q5) only contains the answer to part (i). The answer to the other parts is: (ii) Supervisory solvency position • Current stable state means that new business strain is balanced by surpluses from previous years’ business. • New business volume will be half of previous. • Strain will reduce in first year, previous years’ surpluses will be unchanged, so supervisory solvency should improve considerably. • Full effect of reduced strain not felt in first year, due to time taken to scale down operations, extra staff severance pay, etc. (iii) Longer-term position • Over the next year or two solvency may improve further, as acquisition expenses reduce to the new stable level. • Total annual profit will gradually stabilise as more of the existing business reflects the new level of sales. • Time taken for this will reflect the durations of the new and existing policies. • The new stable level of acquisition expenses (per-policy) will be higher than before, because of fixed overheads. • Maintenance expenses will reduce as renewal volumes fall: per-policy level will stabilise at more than 50%, again due to fixed overheads. • Increased per-policy renewal expenses will be reflected in the valuation basis: this will cause an immediate valuation strain (reduction in solvency) in the year of the basis change. • Solvency position will depend on how much surplus is distributed each year. • The decreased efficiency will make per-policy profit reduce or even become negative. • If profit still positive then company will stabilise its solvency position with a smaller level of annual profit distribution than previously. • If loss-making, then the solvency position will deteriorate indefinitely even if annual surplus distributions are reduced to zero. (iv) Possible actions • Try to increase average production per salesperson, to counter the effect of the fixed overheads. • May be possible to achieve this by using other channels, eg brokers or direct sales. • Or make policies more marketable (but any price reductions might be counter productive). • Could increase premium rates for new contracts, but may cause further drop in sales. • Could increase variable charges on existing business, but policies may lapse. • Relocate remaining staff into fewer offices, to reduce overheads. • Try to recruit more salespeople to replace those lost. • Consider merger or acquisition, or some other capital project, using the free assets initially released by the change, so as to obtain new profit sources. • If downsizing is inevitable, try and reduce the expenses as quickly as possible. • In extreme could close to new business entirely, so as to remove all acquisition overheads. • Any proposals should be tested by projecting the future solvency position. I'm sorry for any confusion these two errors may have caused. Best wishes Mark
