While increasing the pv of the liability cash flow by

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while increasing the PV of the liability cash flow by about 15%. This would create a deficit of about 7%. Since the 30-year corporate bond had the highest yield of the four assets, forgoing it would also increase the purchase price of the bond portfolio. Overall, the decision to avoid corporate securities leaves the company facing significant interest rate risk while incurring additional cost to purchase the bond portfolio. The revised portfolio is summarized in the table below. IA – page 7
5% discount Asset Units Duration PV per Unit Total PV Price per Unit Total Price T Bill 58.3 1.0 952.38 55566 990 57760 T note 2858.9 8.7 837.84 2395271 1000 2858853 Corporate Bond 10 yr 0.0 8.6 861.01 0 1000 0 Corporate Bond 30 yr 0.0 16.8 861.65 0 1000 0 8.5 2450837 2916613 IA – page 8
[Question 7] noitseuq A. With a profit margin of 24.94% and an IRR of 49.03%, which are far higher than the stated goals of 9% and 12%, a reduction in premium would be justified. B. Given the results on the Output Summary tab, setting the per-unit premium proportional to issue age is appropriate. Profit margin is consistent across the four age bands, and an insulated bond portfolio reduces the impact of interest rate on an individual age band. Results by gender indicate that varying rates by gender would allow for more accurate pricing. At the current premium rates, the model projects profits for both genders. However, if premiums are reduced to target a profit margin of 9%, the company would be well below that target on female policyholders. A gender factor could be applied to target the same profit margin for both genders. C. Sensitivity test results were as follows: Profit IRR Incidenc e 1.2 20.0% 37.4% 1 24.9% 49.0% 0.8 29.9% 62.9% Maintenance Expense per 1000 of Salary 7 21.5% 39.5% 5 24.9% 49.0% 3 28.4% 60.3% Asset Earned Rate 3% 19.4% 43.2% 5% 24.9% 49.0% 7% 30.5% 54.5% The least critical of the three assumptions is maintenance expense. Maintenance expenses are relatively predictable, and it would take a significant change to internal business processes to increase or decrease those expenses by 40% of the current rate. Incidence is the most critical because of its impact on IRR. While the impacts to profit margin were similar at the tested levels of incidence and asset earned rate, IRR was more sensitive to changes in incidence than asset earned rate. Both assumptions are uncertain in the future and critical to the pricing of this product. IA – page 9
[Question 8] noitseuq A. Gross premium reserve is defined as the present value of all future benefits and expenses less the present value of future premiums. In the early policy years this value is often negative, partly due to the high initial expenses (such as year 1 commission) that have already occurred and are not part of the GPR. GPR also capitalizes expected future profit. Regulatory reserves are a way for regulators to force insurance companies to book a liability that requires sufficient assets on the balance sheet to cover a major loss event or change in market conditions that may otherwise threaten the solvency of the company. These reserves are intentionally conservative, always non-negative, and not a reflection of expected future experience.

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