Test 2: Ch 23-28 and 32-34 Flashcards
Ways to value assets:
SHAM FADS
Smoothed market value Historic (book) value Adjusted book value Market value Fair value Arbitrage Discounted cashflow model Stochastic model
Main factors influencing investment strategy :
SOUNDER TRACTORS
Solvency requirements and statutory valuation requirements Objectives of the institution Uncertainty of liabilities Nature of L Diversification Existing asset portfolio Risk appetite of the institution
Term of the liabilities
Return expected over long term from various asset classes
Accrual of future liabilities
Currency of current liabilities / Correlations between various assets
Tax and cashflow requirements
Other funds strategies / Opportunity cost of capital when mismatching
Restrictions on how the fund may (statutory, legal and voluntary)
Size of the assets in relation to liabilities and in absolute terms
Three main definitions of risk in institutional investment strategies: PVPR
Probability of default (unlikely)
Variability of return (also unsatisfactory because liabilities change too)
Probability of failing to achieve the investor’s objective (most practical)
Relative performance risk
Factors to consider prior to a tactical asset allocation switch:
CEPEL
Constraints on the changes that can be made to the portfolio
Expected extra return relative to any additional risk
Problems involved switching a large portfolio
Expenses
Level of assets available
Main factors influencing individual investment strategy:
PRINCES
- Practical considerations
DEK (no direct investment, high expenses, no
knowledge) - Returns on different assets FUT
(tax considerations, ‘feel-good’ and
undervalued assets, speed of changing assets)
-Investment freedom and
constraints LURE (excess assets, uncertainty,
insurance risk appetite (WAD) and liquidity) - Nature of assets and liabilities (CANTC)
- Cashflow requirements
- Expenses/expertise
- Spread(variability) of market values
Considerations
DORA
Types of benefit payment and asset strategy:
GIDI
Guaranteed in nominal terms:
- pure/approx. matching assets
- seek immunisation
Index linked
- index linked bonds
- equities
Discretionary
- real assets - highest expected return possible
- requirement to match PRE- policyholder reasonable expectations
Investment linked
- assets to replicate/match index
- (assets used to determine the benefits , derivative strategy or CIS)
Regulatory framework limitations in developing an investment strategy: (TECH SCAM)
Type of asset can invest in Extent of mismatching allowed Currency Hold certain proportion in a certain class of assets Single counterparty maximum exposure Custodianship of assets Amount of any one asset used to demonstrate solvency Mismatch reserve
Limitations of Redington’s immunisation theory:
FAT DRY PI
Fixed nominal values assumed (but can use ILG)
Assets of long enough duration may not exist
Timing of asset proceeds/liabilities unknown
Dealing costs ignored
Re-balancing needed after interest rate change
Yield curve assumed to be flat
Profit from mismatching eliminated
Interest rate changes assumed to be small
Expenses for securing new business:
PUMaCR
Processing/ product design Underwriting Marketing Commission Research
Factors affecting cost of benefit:
(TIERCCCOP)/
(ICC COPTER)
Tax Investment income Experience rating – adjust future premiums - how was the actual claim experience? better or worse than Reinsurance cost Commission – possibly expense? Cost of capital – still to be covered Contingency margin Options + Guarantees Provisioning bases – cost of establishing solvency capital, becomes positive a termination-- cost of capital expected? (connect to data chapter)
Factors affecting the marketability of products:
ICE
Internal issues: Product quality, reputation etc
Competitors’ actions
External environments (economic situation, trends, policy changes)
Factors affecting benefit paid in discontinuance:
FRACPENCS
Frequency of change of discontinuance terms - PRE, Cost
Regulation and market practice
Asset share of a policy (retrospective res)
Competitiveness
Practical considerations – cost, calculation ease.
Expectations - PRE, short and long duration
New business disclosure
Cost of implementing the discontinuance terms
Suitable terms - Lump sum, paid up value
Insolvency and closure of a life insurer why this rarely happens:
(RIPTC)
Regulation Intervention - Reinsurance, Investment strat, New Bus Projecting solvency Takeover of business Compensation schemes
Factors affecting the level of benefit paid out in the case of insolvency:
(ARE)
Asset level - surplus or deficit
Rights of beneficiaries – terms of scheme or overriding legislation
Expectations – benefits if did not cease, future, accrued, discretionary.
Factors considered when modeling future solvency RECSO
Redemption of debt - Amount and timing Estimated future loss/profit net of tax Current value of surplus assets Staff - Relationships & employee benefits Outstanding financial obligations
When taking over discontinuance business or for a merger/acquisition, consider:
RIEL SyCRETS
Relocation of staff
integration of system platforms
Effect on unit costs
Location of Business
Synergy of the products
Cost vs Reward of the takeover/merge
Regulatory differences if in different sectors
Employee benefit scheme new members
The effect on the company’s long term goals
Shareholders on both sides
