Dynamic Financial Conditions Analysis, ch 5

[ajstudies]

Is this another one that just needs to sit until the manual comes out?

I am not getting it, but maybe in the formulation of my questions, just maybe I am starting to get it.

Do I understand correctly that this chapter is from the point of view of the insurance co/financial institution that provides the investment vehicles to the pension plan? And not from the POV of the pension plan? And that is why early retirements are a problem. For that matter any retirements, b/c retirements mean that the plan removes $$ from the investment vehicle in order to distribute to the retiree. Am I close?

Maybe having that down, I can read the chapter and it will start making sense.

[Random Walk]

Yes, the goal of the DFCA Handbook is to help actuaries assess the financial condition of the insurer. So early retirement is bad because it could cause dollar outflows earlier than the insurer expected, potentially leading to problems with the liquidity of assets, duration matching of assets and liabilities, etc.

Presumably the company would have planned for normal-retirement-age retirements when it made its investments, so those wouldn't cause the same problems.

[ajstudies]

Thanks for the clarification.

[hockey_puck]

How does this topic relate to the objectives of our exam? Does it fall under the syllabus category of "Describe funding alternatives for retiree benefits"?

[Random Walk]

The GRASP suggested study schedule puts this reading under "Risk Measurement and Management", which seems to correspond to Learning Objective #10: "Evaluate the risk profile of a portfolio of products".

But a reading could address more than one Learning Objective.

[Willie Mosconi]

The GRASP suggested study schedule puts this reading under "Risk Measurement and Management", which seems to correspond to Learning Objective #10: "Evaluate the risk profile of a portfolio of products".

But a reading could address more than one Learning Objective.

I agree with this. The chapters from Group Insurance on Regulation include readings on taxation. The manual doesn't split up the chapters into the respective educational objectives. I decided in this case to postpone the tax readings from those chapters until I get to the taxation section.

[ajstudies]

Ok, I got a bit further my second time through, but I still have questions. I'll list them by page #:

V-2, #2. What are "As"? Is this just a typo for FAs, which, if I keep reading for several pages, seems to refer to "Financial Arrangements"? What are "SPVs"? I see, further down on the page, something called a "stable value plan option", but I'm not sure if that fits in #2. And despite reading the definition of "stable value plan option" at the bottom of the page, I still don't really know what that is.

V-16. (Look, I made some progress!) Next to last paragraph, last sentence reads, "Asset ownership...serves to guarantee...that the assets will be bankruptcy remote..." I think he means that the assets are protected from bankruptcy b/c of the trust setup. Is that right? (And if so, why doesn't he say it that way. Grrrr, obfuscation...)

V-18, 4th paragraph, last paragraph, What is "Free Money"?

V-21, can anyone explain the formulas? I can't even tell what they are trying to show? And who the heck uses a "/" as a formula variable? (Ok, you don't have to answer that last question.)

[Random Walk]

V-2, #2. What are "As"? Is this just a typo for FAs, which, if I keep reading for several pages, seems to refer to "Financial Arrangements"?

Probably a typo. I've never heard of "As", except in relation to baseball.

What are "SPVs"?

"Special Purpose Vehicle". These were made famous by Enron. There's a definition at:

http://www.investopedia.com/terms/s/spv.asp

V-16. (Look, I made some progress!) Next to last paragraph, last sentence reads, "Asset ownership...serves to guarantee...that the assets will be bankruptcy remote..." I think he means that the assets are protected from bankruptcy b/c of the trust setup. Is that right? (And if so, why doesn't he say it that way. Grrrr, obfuscation...)

See the definition of SPV for more on "bankruptcy remote"

V-18, 4th paragraph, last paragraph, What is "Free Money"?

They defined this term on the previous page. See V-17, 3rd paragraph. It's the part of an IPG fund in excess of annuity liability.

V-21, can anyone explain the formulas? I can't even tell what they are trying to show? And who the heck uses a "/" as a formula variable? (Ok, you don't have to answer that last question.)

Well, they say this is an example of a "flawed formula". Maybe the bizarre use of "/" is one of the flaws. :)

[ajstudies]

Thanks for the link. It's very helpful.

[Random Walk]

V-21, can anyone explain the formulas? I can't even tell what they are trying to show? And who the heck uses a "/" as a formula variable? (Ok, you don't have to answer that last question.)

I've finally read this study note closely. I can't make head or tails of the formulas on page V-21, either, but it looks like there was a typographical breakdown. (I mean, what else could it be? The variables include "[n", "[q" and "/"!)

I looked around online, but I didn't find an errata for this study note.

My hope is that if they test this page, they'll present a proposed market value adjustment formula (different from the one that was supposed to be on this page) and ask what's wrong with it. To answer that kind of question, we could choose from the flaws listed at the bottom of page V-21 and use other ideas from this study note.

I don't think they would ask us for the actual flawed formula they meant to show here, especially since it's indecipherable as printed, so I'm scratching it off my list of things to learn.

[Julietn528]

has anyone read this article yet? I am still confused by "free money"

[Reflection]

I'm not very good with DFCA, (so if this isn't right someone please let me know), but from Random Walk's notes above, I looked to page V-17 for the answer. It looks like IPGs (Immediate Participation Guarantees) have an associated fund the insurer holds. This fund often contains the amount the insurer would be liable for under such guarantees, but sometimes it ends up with more money than that due to investment returns and other factors. The amount in the fund that exceeds the liabilities is referred to as "free money".