Hello 1. The solution in X5.1(i) says, under ALM, capital sum may exceed value of future profit stream from annuities .....because of SII restrictions on matching adjustment and longevity risk would be passed to.... how does matching adj restriction come into place here? 2.Under 'Other' in the same part, it says - entering new sectors of the annuity business,eg- bulk annuities. How? X5.1 (iv) I understand what is prepayment risk but could not make sense of what is written in first para under prepayment risk here? who is operator here? option to terminate etc? thanks in advance
Hi This is referring to securitisation. If there is a difference in the future profits that are expected to arise to that which are allowed to be recognised within SII, then securitisation becomes effective. In this situation, the company may not be allowed to take account of all the liquidity premium (due to MA restrictions) which it would likely receive from investing in corporate bonds to meet its annuity liabilities. However, by securitising this future return /profit, the company can increase the capital recognised now with no increase to its liabilities (as these would be based on Solvency II). By entering into this market the company is increasing its portfolio and therefore reducing the random fluctuation element of longevity risk. A possible example would be where the infrastructure consortiums (possibly government backed), such as within schools and hospitals, terminate the contract and pay back the capital investment to the insurer. The insurer then bears the risk that it will have to invest this capital repayment at unknown rates in order to match its annuity liabilities. Hope this makes sense. Thanks Em
