IandF_ST2_200509_Exam-merged

It may allow reserves to be released.

Three hours

Lack of confidence in the data.

All 7 questions

Professional guidance and legislation.

Read the questions and make notes if necessary

Both the answer booklet and the question paper

The company may want to understand the reasons for the deterioration and assess potential impacts on future experience, such as the incidence of a new disease.

The 2002 edition of the Formulae and Tables and their own electronic calculator

If the company's solvency position has deteriorated, it may need to protect itself more from adverse claims experience by ceding a larger proportion of business to a reinsurer.

Low reversionary bonus and high terminal bonus appears appropriate.

Future valuation strain.

The company should consider factors such as the investment strategy, expected investment returns, policyholder behavior, the need for liquidity, the impact on future profitability, and the overall financial stability of the company.

It may require the company to cede a larger proportion of business to a reinsurer to ensure smooth underwriting results, avoiding large profits or losses.

The company needs to consider competitive pressures, such as whether most companies have a high reversionary bonus.

Based on recent mortality experience of the life office or industry experience.

The company should follow principles such as ensuring accuracy in data collection, adhering to regulatory requirements, maintaining consistency in assumptions, considering the impact of policyholder behavior, and reflecting the economic environment in the calculations.

If the company starts writing business in new markets or adds new benefits to products, it may need to reassess its reinsurance strategy to manage the associated risks.

Changes in solvency or tax regulations and improvements in reinsurance rates can make reinsurance more attractive.

The company should consider the target market's requirements, such as expected guarantees or desirable levels of smoothing.

Inflation is used for inflating expenses and switch charges, particularly considering that a large proportion of expenses are likely to be salary-related.

Prudently based on analysis of recent experience, allowing for inflation.

The company should set assumptions based on historical data analysis, market trends, expected future performance, policyholder behavior, and any regulatory guidelines that may apply.

An increase in business volume may lead the insurer to seek more reinsurance to help finance new business strain and manage risk exposure.

Shareholders may prefer bonuses to be paid sooner and may benefit from higher distributions if paid through reversionary bonus based on total surplus.

Variations in mortality experience can be influenced by underwriting standards, investment performance, expenses, inflation, withdrawals, and new business mix or volume.

There is unlikely to be a highly liquid active market for mortality risk, so the assumption is set by reference to industry statistics, internal experience investigations, and information from reassurers.

They may be included in general renewal expenses and should allow for the impact of surrenders if this increases reserves.

Expenses should be subdivided into direct expenses, which depend on the volume of new business or level of in-force, and overheads, which relate to general management and service departments not directly involved in new business or policy servicing.

The analysis might be carried out by collecting detailed data on current expenses, categorizing expenses into fixed and variable costs, benchmarking against industry standards, and using statistical methods to project future expenses.

Reserves should be sufficient to ensure liabilities can be met as they fall due.

Changes in local regulations may allow the company to reduce the amount of solvency capital it needs to hold, encouraging it to reinsure more of its business.

Selling too much business can lead to higher capital strain, solvency problems, operational difficulties, reduced service standards, increased surrenders, and bad publicity.

The expense assumption might be determined by reference to expense agreements available in the market, industry statistics, and features specific to the company's own experience.

The company should split expenses into cells based on the whole business of the life company, specific accounting funds, and each main product line, further subdividing into regular and single premium business, paid-up policies, etc.

Based on recent experience or known charges, particularly the average annual management charge.

To reduce overall retention, limit the impact of any one claim on profits, gain help with risks it has limited experience of, and receive assistance with underwriting substandard lives.

The implications include potential inaccuracies in expense assumptions, the risk of outdated data affecting financial projections, and the possibility of not capturing changes in the business environment or operational efficiencies.

Reserves should include suitable valuation of all liabilities, allowing for options available to policyholders, guaranteed benefits, and expenses with inflation allowance.

Selling too little business can result in lower income that does not cover expenses, leading to lower profitability and a need to spread expenses over fewer policies.

Potential purchasers might require a margin to reflect the risk that mortality and expense assumptions prove to be incorrect.

The insurer may be concerned about claims fluctuations arising on a small book of business, especially if it has not written significant volumes of business.

It is important to ensure that the cells are not too small, as this could make the analysis unreliable.

It is based on assets used to back sterling reserves and is not a critical assumption given that sterling reserves are likely to be small.

It must be paid on death or maturity.

The method should recognize profit appropriately over the duration of the policy and avoid discontinuities from arbitrary changes in basis.

Actions such as misselling can lead to failures in systems and controls, impacting new business processing, claims handling, and policy servicing.

Expenses need to be inflated to account for inflation and any known changes in expense levels, ensuring they accurately reflect future costs.

Future annuity payments are known amounts after allowing for mortality, making them equivalent to the maturity proceeds of a series of zero coupon bonds of matching terms.

The reinsurer can review the insurer's underwriting procedures to ensure they are up to date and reflect the latest techniques used by other insurers.

Unit growth rate is linked to the rate of interest and may depend on the current fund.

The main costs are salary and salary-related expenses, which should be split by department or function.

Departments linked to a particular product can be allocated to that product line by splitting time based on the processes undertaken, such as policy servicing, policy setup, or claim settlement.

They increase the guarantees under a policy.

Counterparty failure, such as that of a reinsurer or issuer of corporate bonds, can pose significant risks to the financial stability of a life insurance company.

Factors include the average number of policies in force over the analysis period for renewal expenses and the average number of claims for termination expenses.

The appropriate discount rate is the market yield on zero coupon bonds, which should be risk-free for guaranteed amounts.

Ceding part of the profits to the reinsurer may reduce overall profitability, potentially negating the life insurer's aim.

Expenses can be split using a timesheet analysis for functions that work on a variety of processes/products.

The guaranteed benefits might exceed asset share.

The outputs should be capable of independent verification for reasonability.

Investment expenses are likely expressed as a percentage of funds under management, treated as a deduction from earned investment return.

The yield on government fixed interest bonds can be used as a proxy for risk-free yields, although adjustments may be necessary for specific market issues.

To protect the solvency of the company against extreme events.

Pure overhead departments can be split pragmatically across other departments, for example, HR could be split in proportion to the number of staff in each direct area.

Because the company invests a significant proportion of assets in equities, which have a volatile return.

There needs to be a cash flow generated from the guarantee biting, which occurs if the model produces a fund value at the 10th anniversary that is lower than the original premium.

Changes in business mix, technology, and new products over five years may invalidate old analyses, making them less relevant for current decision-making.

Expected expense cashflows might be valued by discounting at the yields available on index-linked government bonds, with adjustments for expected expense inflation.

Financing reinsurance can help mitigate new business strain and may provide legislative and tax advantages if the reinsurer is offshore.

Property costs can be split by the floor space occupied across all departments, with expenses allocated based on salaries.

The company may have to pay more than asset share, reducing its free assets.

The deterministic model projects forward the fund position based on an expected level of investment returns.

A recent expense analysis can be used for pricing assumptions, ensuring future business profitability, or assessing the economic value of the company.

The inflation assumption would be set by comparing market yields on index-linked and fixed government bonds, with necessary adjustments.

To obtain additional data or support from the reinsurer, especially if its term assurance rates have moved out of line with other providers.

Computer costs should be allocated to departments based on computer usage.

By charging for the guarantees or paying less than asset shares at other times.

The fund value starts at a level greater than the premium and is expected to grow, likely exceeding any fund decreases due to charges.

Clarifying inflation increases is crucial because inaccurate assumptions can lead to invalid analyses of surplus and profit.

The life insurance company might have reinsured some of its business to manage risk exposure, stabilize financial results, protect against large claims, and improve capital efficiency.

One-off capital costs should be amortised over their expected useful lifetime and treated as part of overheads, spread by department.

It increases the risk of having to pay more than asset share, especially if business is sold in tranches.

There is a risk that investment values will fall, resulting in the fund at the 10th anniversary being lower than the guarantee level.

The company may look to reinsure a greater proportion to mitigate increasing risks, enhance solvency margins, comply with regulatory requirements, and support growth in new business.

Investment costs are directly allocated to investment expenses and split by product line based on funds under management.

When the insured event occurs.

The company would have to pay the shortfall to any policyholder who surrenders.

Sources of risk include mortality risk, investment risk, expense risk, and lapse risk.

Exceptional items that are unlikely to recur should be excluded from the analysis.

Terminal bonus can be reduced to match any fall in asset share.

New business can introduce risk through underwriting uncertainties, potential adverse selection, increased operational costs, and the impact of changing market conditions.

The cost derived by the deterministic model is inappropriate because it assumes no risk of investment value falling, which is not realistic.

After splitting all expenses, total expenses by product line can be determined, and within each product line, expenses can be split into initial, renewal, termination, and investment expenses.

Reversionary bonus forms part of the supervisory reserves, while no reserve is held for terminal bonus.

An actuarial model should satisfy requirements such as accuracy, reliability, transparency, flexibility, and the ability to handle various scenarios.

It increases the statutory reserves that the company needs to hold.

A deterministic model does not account for variability in investment returns and policyholder behavior, which can lead to underestimating the required charge for the guarantee.

It could significantly increase statutory reserves and reduce the company's free assets.

A stochastic model can incorporate a range of possible outcomes and variability in assumptions, providing a more comprehensive assessment of risk and potential costs.

A financial economic modeling approach, such as a discounted cash flow model using market interest rates, could be used to assess liabilities.

Assumptions can be determined through historical data analysis, market research, expert judgment, and regulatory guidelines.

The average profitability may be reduced and capital requirements may differ, potentially leading to solvency problems.

It may lead to insufficient expertise to cope with growth in volumes of certain business.

It may lead to lower profitability.

Differences in the socio-economic group of customers, problems with underwriting, or differences in the mix by distributor.

There is a risk that commission paid is not clawed back on surrender of policies due to distributor practices.

Through changes in their premiums or charges, influencing the volume or mix of business achieved.

It should be rigorous, well documented, and adequately reflect the distribution of the business being modeled.

They must allow for features of the business that could significantly affect the advice being given.

They should be appropriate to the business being modeled and consider the special features of the company and the business/economic environment.

A stochastic model runs many different investment scenarios where future investment returns are governed by a probability distribution function, allowing for the assessment of various outcomes including poor performance.

The company runs many simulations, and the cost of the guarantee is determined by the average shortfall over all simulations, which may lead to a higher annual management charge.

The key cashflows include annuity payments and expenses.

Projected cashflows must be discounted at an appropriate investment return to value them on a market consistent basis.

The decision depends on the purpose of the calculation and the required degree of accuracy.

The company is likely to choose a deterministic projection approach.

Assumptions for mortality, expenses, expense inflation, and investment return are required.