Exam Paper Revision

Question 1

If RB=3% per year and AS=1000 and Gtee(after previous RB)=100, what is the situation of AS and Gtee after 1 year? (assume 0% inv ret)

Answer 1

AS=1000

Gtee=100+0.03*100

Question 2

Why might a policyholder choose not to take up the most onerous option for company e.g. not take their full GAO?

Answer 2

1. Tax free cash to pay off large liab
2. Ill so enhanced annuity somewhere else
3. Go with OMO as gives better rates than GAO e.g. males in gender neutral

Question 3

When might you calculate prospective AS?

Answer 3

1. Agrees with PPFM/TCF/PRE
2. All meterial cashflows taken into account (long enough time period)
3. Runs into maturity value

Question 4

What must you always remember when making changes to contracts or modelling them?

Answer 4

PPFM/TCF/PRE

Question 5

Give example of dynamic management actions and policyholder actions?

Answer 5

Management:

1. Changing RB/TB rates
2. EBR rebalance
3. Asset mix change
4. Suspend/reduce smoothing
5. Change MVR approach
6. Time delay of action vs. stress
7. Take PPFM/TCF/PRE into account

Policyholder:

1. Change take-up rate
2. Any investments they make
3. Withdrawals
4. Mortality

Question 6

Why hold more than required capital? (15 points split into 4 sections)

Answer 6

Risk Capital: (capital to cover other risks)
1. Additional risks not covered by the regulatory requirements e.g. Ops risk
2. Pillar 2 vs. Pillar 1
3. ICG
4. Own EC calcs
5. Credit/liquidity/ops/group/insurance/pension scheme risks may not be covered
For Working Capital: (capital that’ll be used)
1. NB
2. Overheads/development costs
3. M&A planning
Ongoing Solvency: (capital to cover future solvency)
1. Ensure future solvency
2. Possible economic volatility
3. Pre-empt SII increased capital requirement
Other:
1. Credit rating
2. Reassure/attract customers through high financial strength
3. Low risk appetite of shareholders
4. Support share price/smooth dividends

Question 7

If moving from risky interest rates to gilts/swaps (risk free) to value liabs, what will the impact be on capital requirements?

Answer 7

1. Cap Req based off assets and liabs
2. PV factor won’t be as high, so increase in time 0 liabs
3. If credit spreads widen, value of assets decreases but no change in liabs so mismatching
4. If has some assets in gilts and use swaps to value liabs, which contain small credit spread, then mismatch
5. Free assets reduce and possible chance of insolvency