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4. (8 points) you are the chief actuary of global insurance, a public company selling only universal life, with divisions located in the u.s., canada and australia. your actuaries have discovered pricing inadequacies on the in-force products. global’s cfo is very interested in the volatility of the company’s results due to both the foreign exchange markets and the pricing issues. (a) describe the income-based reserve methodology that global must follow in each jurisdiction in which it is conducting business. include in your description the accounting implications of the pricing inadequacies and their impact on the current year’s country-specific income statements. (b) outline a report for the cfo that includes the following: i. the foreign exchange risks that global has assumed. ii. reasons why global might consider hedging those risks. iii. hedging strategies and instruments that may be used for currency hedging. course 8: fall 2005 - 5 - go to next page finance and enterprise risk management; core segment morning session 5. (5 points) you have been hired by salmon inc. to provide investment strategy advice for salmon’s defined benefit plan. salmon’s management is concerned about the accuracy of the plan surplus calculation in light of volatility of the surplus over the past two years. you have been provided the following plan information: plan assets $240 million plan liabilities $250 million the plan’s current investment strategy, valuation and reporting are: • required rate of return on assets is 7%. given this constraint, minimize asset volatility. • liability risk is determined using monte carlo testing. • discount rate for liabilities tied to expected return on assets • the annual report to management provides a best estimate, 20-year funding level forecast, measured on a gaap basis. (a) describe weaknesses in the current strategy, valuation and reporting. recommend improvements to better manage market-related risks of the pension plan. (b) outline methods to control pension plan risks that are not market related. course 8: fall 2005 - 6 - go to next page finance and enterprise risk management; core segment morning session 6. (8 points) moby life is considering selling an in-force block of term insurance. you are the appointed actuary of the company and have been asked by the ceo to estimate the fair value of the block as of december 31, 2005. future gross cash flows have been projected as follows: 2006 2007 2008 premiums 500 490 486 expenses & commissions 75 74 73 death claims 64 66 66 assume there are no further cash flows beyond 2008. moby life reinsures 50% of the business under a coinsurance treaty and receives 10% of ceded premium as a reinsurance allowance. you have been provided with the following information: risk-free rate: 4% rate of return on assets: 8% cost of capital: 15% benchmark equity to liability ratio: 10% effective tax rate: 35% (a) (2 points) describe the difference between a fair value methodology and u.s. gaap for valuation of policy liabilities. (b) (4 points) use a cost-of-capital approach to determine the fair value of the policy liabilities for the term block of business as of december 31, 2005. assume all cash flows occur at mid-year. show your work. (c) (2 points) the ceo would like to know how much this block of business is worth if it is kept with moby life rather than being sold. suggest an alternate measure for valuing the business if it is retained by moby life. describe the differences between this measure and the fair value methodology in (b). course 8: fall 2004 - 7 - stop finance and enterprise risk management; core segment morning session 7. (4 points) allegro annuity is an insurance company domiciled in the u.s. that issues a full range of fixed annuity products. starting this year, allegro is required to comply with the cash flow testing c-3a risk-based capital requirement. the company has hired you to help them understand the impact of this requirement. (a) compare the c-3a cash flow testing requirement with the factor-based c-3a requirement. (b) allegro currently holds statutory reserves that are calculated using the carvm methodology and meet minimum regulatory standards. explain why allegro may still be required to hold additional capital under the c- 3a cash flow testing requirements. **end of examination** morning session course 8: fall 2005 - 8 - go on to next page finance segment afternoon session **beginning of examination** finance segment afternoon session beginning with question 8   |
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