Page 4 of Chapter 13 Unit Pricing has a question: Explain the main risks to the company of maintaining a management box. The solution includes - 'the most significant risk here is that the value of the underlying assets goes down, so the value of the units that the company is holding for its own account decreases.' Assuming that the units held by the company have the same proportions of assets as the units held by the policyholder, why is there a risk in the value of the underlying assets going down? The policyholders' units will go down similarly, and therefore shouldn't the units in the management box match policyholders' units perfectly?
Hi What you say is true about the unit fund. Any movement in the insurer's assets will be reflected by the same movement in the policyholders' unit fund. However, the management box is owned by the insurer. So any fall in the value of the assets in the box is a direct loss for the assets owned by the insurer. Best wishes Mark
