| SOA真题November2004Course8E |
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COURSE 8: Fall 2004 - 1 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
**BEGINNING OF EXAMINATION**
FINANCE AND ENTERPRISE RISK MANAGEMENT; CORE SEGMENT
MORNING SESSION
Questions 1-3 pertain to the Case Study.
Each question should be answered independently.
1. (7 points) Zoolander Life is very concerned about being able to secure reinsurance for its
term life insurance business line after January 1, 2005. Richard Scarlet, the reinsurance
intermediary, has been unable to secure a replacement for Rose Re’s YRT reinsurance
program at a reasonable price.
As an alternative, Richard Scarlet has proposed accepting a 100% funds withheld
coinsurance contract which is available from Cranberry Reinsurance Solutions. Under
that arrangement, the reinsurance allowance is set at 10% of ceded premiums, and the
risk charge is 1% of the outstanding surplus account for the prior year.
A simplified income statement for the term life insurance business line follows:
Zoolander Life
Projected 2005
Term Life Business Line
Before Reinsurance
Premiums
Gross 33,000,000
Ceded 0
Net Premiums 33,000,000
Investment Income
Gross 1,650,000
Ceded 0
Net Investment Income 1,650,000
Reinsurance Allowance 0
Total Revenue 34,650,000
Claims %26amp; Surrenders
Gross 19,000,000
Ceded 0
Net Claims %26amp; Surrenders 19,000,000
Reserve Increase
Gross 11,000,000
Ceded 0
Net Reserve Increase 11,000,000
Total Benefits 30,000,000
Expenses %26amp; Commissions 3,500,000
Gain from Operations 1,150,000
COURSE 8: Fall 2004 - 2 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
(a) For Zoolander Life, show:
i. the change in the income statement for 2005 under a 100% funds
withheld coinsurance arrangement
ii. the outstanding surplus account as of December 31, 2005.
(b) Explain, from Zoolander’s perspective, the benefits of their existing YRT
reinsurance as compared to the benefits of Cranberry’s proposed arrangement.
(c) Recommend if Zoolander should purchase the reinsurance from Cranberry Re or
should retain the risk. Defend your answer.
COURSE 8: Fall 2004 - 3 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
Questions 1-3 pertain to the Case Study.
Each question should be answered independently.
2. (11 points) Bonnie Hawke, Zoolander Life’s 2nd Vice President of Capital Planning,
proposes to allocate capital by line of business using the GAAP required surplus
methodology. You are given the following information.
Zoolander Life Proposed Capital Allocation
Line of Business 2003 Projected
2004
Annuity 100.0 103.0
Disability 150.0 160.0
Life Insurance 200.0 240.0
Variable 215.0 225.0
Corporate 367.6 390.0
Total 1,032.6 1,118.0
(a) Explain why a company might choose to allocate capital by line of business.
(b) Evaluate the appropriateness of the proposed allocation method chosen by Bonnie
Hawke as compared to other capital allocation methods.
(c) Using Bonnie Hawke’s proposed allocation, determine whether each line of
business is projected to create or destroy economic value in 2004 and whether
each line of business is projected to generate free cash flow. Show your work.
(d) Explain the implications of the results in (c) above.
COURSE 8: Fall 2004 - 4 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
Questions 1-3 pertain to the Case Study.
Each question should be answered independently.
3. (11 points) In a recent private conversation with you, Bill Buck, Zoolander’s new 2nd
Vice President of Enterprise Risk Management, expressed his concern about Zoolander’s
current compensation structure and top management’s frequent absences.
He added, “I fear being caught in a situation similar to Enron or Barings. With the
shareholders, Board of Directors, rating agencies and management all monitoring those
companies, why wasn’t anyone aware of the problems before it was too late?”
(a) (2 points) Identify the items in Zoolander’s current compensation structure that
create improper incentives and explain how they could impact the company’s
financials.
(b) (1 point) Describe the concerns a shareholder may have with the structure of
Zoolander’s compensation system.
(c) (4 points) Describe the roles that the shareholders, Board of Directors, rating
agencies, and management should each play to ensure that a company does not
fail.
(d) (4 points) Identify areas where Zoolander’s shareholders, Board of Directors,
rating agency and management are not meeting their obligations.
COURSE 8: Fall 2004 - 5 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
4. (13 points) You are the CFO for Van Halbach Airlines. Research has determined that
adding routes to Nebraska would be very profitable if fuel costs remain level or drop.
Financing of 100 million is needed to add the additional routes.
Assume the following:
%26#8226; Only 2 scenarios exist for the next year: fuel costs remain level or they increase.
%26#8226; The value of the additional routes in 1 year is 250 million if fuel costs remain
level.
%26#8226; The value of the additional routes in 1 year is 30 million if fuel costs increase.
%26#8226; Risk-free rate is 3%.
%26#8226; Cost of Equity Capital is 10%.
%26#8226; Cost of Debt Capital is 6%.
%26#8226; Probability that fuel costs remain level is 50%.
%26#8226; Risk neutral probability that fuel costs remain level is 60%.
(a) (4 points) Describe advantages and disadvantages of financing the route
expansion through each of the following methods:
%26#8226; Equity
%26#8226; Public debt
%26#8226; Private debt
%26#8226; Hybrid debt
(b) (6 points) Calculate the value to Van Halbach of the additional routes under each
of the following scenarios. Show your work.
%26#8226; The financing is from the issuance of common stock
%26#8226; The financing is evenly split between common stock issuance and
public debt
%26#8226; The financing is from public debt
(c) (2 points) Recommend a financial structure for the route expansion based on your
analysis in (a) and (b) above. Support your position.
(d) (1 point) Assume derivatives exist to hedge the price of fuel. Explain whether
your recommendation in (c) would change. Support your position.
COURSE 8: Fall 2004 - 6 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
5. (9 points) You have been asked to perform an analysis of the ALM function of Murray
Life. Below is information concerning the assets and liabilities of Murray Life:
Assets Market Value Effective Duration
Bonds 7.0 6.0
Mortgage Backed Securities 4.5 4.8
Stocks (Preferred %26 Common) 2.5 0.0
Mortgage Loans 1.0 7.4
Short-Term Bonds 3.0 1.0
Total 18.0
Liabilities Fair Value Effective Duration
Legacy SPDA 7.0 3.5
Whole Life Insurance 3.0 8.6
Term Life Insurance 5.0 4.2
Total 15.0
Murray Life has added a new SPDA product which is not included in the above analysis.
The new SPDA has a liability fair value of 2.0 and an effective duration of 2.5. The
assets backing this liability are yet to be invested. The available investment choices are
limited to long-term bonds with an effective duration of 8.0 and short-term bonds with an
effective duration of 1.0.
(a) (3 points) For each of i, ii, and iii, provide the allocation of long-term and shortterm
bonds which satisfy the stated ALM goal:
i. Duration matching of the new SPDA’s assets and liabilities
ii. Holistic matching of the asset duration with the liability duration
iii. Holistic minimization of the effective duration of surplus
(b) (2 points) Describe the limitations of each of the approaches in (a).
(c) (4 points) Describe other ALM and non-ALM approaches to protect Murray Life
against general investment risk.
COURSE 8: Fall 2004 - 7 - GO TO NEXT PAGE
Finance and Enterprise Risk Management; Core Segment
Morning Session
6. (5 points) You are the Valuation Actuary of a major U.S. Life Insurance company, which
offers SPDAs and term life insurance.
(a) Describe the issues involved in applying CARVM to regular deferred annuities.
(b) Describe CARVM valuation considerations associated with the product
provisions often included in SPDAs.
(c) Explain how premium deficiency reserves can arise with respect to term life
insurance.
(d) Prior to Regulation XXX, explain how the Unitary method could be used to avoid
having to set up a deficiency reserve for term life insurance.
COURSE 8: Fall 2004 - 8 - STOP
Finance and Enterprise Risk Management; Core Segment
Morning Session
7. (4 points) An insurance company has an S%26P 500 indexed liability due in one year. The
investment manager is willing to assume the risk of paying the S%26P 500 indexed liability
up to a maximum increase of 10%.
(a) Describe a strategy using an option to limit the insurance company’s payment to a
maximum S%26P 500 increase of 10%.
(b) Describe a strategy using an additional option to lessen the cost of the hedging
strategy in (a).
(c) Create separate graphs that show:
(i) The risk profile of the S%26P 500 indexed liability
(ii) The payoff profile of the option in part (a)
(iii) The payoff profile of the additional option in part (b)
(iv) The resulting net total payoff pattern to the insurance company
Ignore option co[1] [2] [3] 下一页 |
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