Hello Last para on pg8 solution of this questions says - too many withdrawals lead to shift from offer basis to bid basis, hence unit price decrease and no of withdrawals increase or NOP decrease due to bad publicity. Could you please explain this last para here - does unit price decrease here relating to existing business or new business? Let me know if question is unclear. Thanks in advance
The unit price decrease is relevant for both existing and new business. However, the point in the solutions is about the impact on existing business. You should find that reviewing your SP2/ST2 course notes helps with a reminder of why high withdrawals from a unit fund can trigger a move from an offer to a bid basis, and why both the offer and bid prices would decrease in that case (it relates to the relationship between the appropriation and expropriation prices, on which the offer and bid prices are based). The solution point states the following: 'Increased withdrawals on unit-linked policies might lead to a switch from pricing on an offer basis to a bid basis, reducing unit prices (to the extent of market spreads and dealing costs) and possibly causing further withdrawals.' What this is saying is that if there are high withdrawals from a fund, this can trigger even more withdrawals due to the fall in unit prices as a result of the offer to bid basis switch. [Which could then lead to a downward spiral.] This is because if policyholders are unhappy with the performance of a fund (and that performance would have been dragged down by the decrease in prices due to the basis switch), they may be more likely to want to get out of that fund. Hope that helps clarify?
