Hi, Ref: Q&A bank, Part 4, solution to question 4.3 This is one of the oldest questions in the book around suitability of responses and I still find that the guidance provided on how to tackle questions is often not apparent in model solutions. In this example, the question is asking how I would respond to a NED who thinks premium rates should be increased after seeing negative surplus arising in some risks. Out of 7 marks, the answers awards 3.5 marks to detailed information on how to conduct an experience analysis on mortality and expenses, which seems very unreasonable as I just find it hard to believe that a NED wants or needs information on how an experience analysis works. In particular in light of what we are taught in CA3 about addressing the needs of the audience, the response should surely say: - Acknowledge this is a concern - We need to investigate further to establish if it's one off or a trend and if a trend, in which lines of business and can then consider changing premium as a course of action (as well as the other points around WP, competition, etc.) So it's surprising for that detail to be awarded 50% of the marks for this question. I know we are constantly told all relevant content will be awarded marks but obviously our approach is shaped by the material we are given. So to the question point (and not just a rant ) - if you were the examiner, would you also award marks for comments on: - Quantum - we don't know if it's a huge change or if it's -£1, so we should consider materiality. - Sequence - depending on the sequence in which the AoS is conducted, this can influence how much is allocated to each step and so it's possible that a re-cut would change the outcome with respect to these two elements. - Basis - the AoS was on a Solvency II Pillar 1 basis but we don't know if that is (A-BEL) or (A-(BEL+SCR)), nor do we know differences between the pricing basis and the regulatory valuation basis, so something around this is a regulatory review and does not reflect actual profitability. - Operational - mention of other things such as if policy administration is outsourced, can we renegotiate terms.
Hi - just picking up on your question points: Quantum - this is covered already in the solution by the point "Consider the materiality of the difference...". Sequence - this seems a little too technical for the audience, but irrespective of that it is very unlikely that changing the order of analysis would turn negatives into positives. Basis - the Solvency II valuation basis is best estimate and so having negative surplus items means that actual experience has been worse than best estimate, which does impact the emergence of "real" profits. [Even if pricing was done on best estimate + margin, the adverse experience will eat into the margin.] Operational - yes: there may be some credit given for a suggestion that the company could be considering taking alternative actions to reverse the adverse experience (although bear in mind that these may incur additional costs and they can take some time to be effective).
