CAS Exam 6C Spring 2017, Question 12
Study guide: Exam 6C
The following information is available for a property and casualty insurance company as at December 31, 2016. All amounts are in thousands of dollars ($000s).
| Held-to-Maturity Bond Portfolio | Available-for-Sale Bond Portfolio | Fair Value Option Bond Portfolio | |
|---|---|---|---|
| Cash flow from 2017 | 1,000.0 | 500.0 | 2,000.0 |
| Cash flow from 2018 | 1,000.0 | 750.0 | 1,500.0 |
| Cash flow from 2019 | 500.0 | 1,000.0 | 1,500.0 |
| Market Value | 2,291.3 | 2,020.3 | 4,561.1 |
Calendar year claims payout pattern
| 2017 | 2018 | 2019 |
|---|---|---|
| 40% | 35% | 25% |
Other information:
- Effective market yield: 5%
- Undiscounted losses and adjustment expenses: 5,000
- Assume all asset and liability cash flows are made at the end of the year.
- The market value of each bond corresponds to the present value of cash flows discounted at the effective yield.
- MfAD for claims development: 8%
- MfAD investment return rates: 0.5%
- Assume that there are no income taxes.
A change in interest rates occurs on December 31, 2016 which causes the yield to decrease from 5% to 4%.
Calculate the impact of the rate decrease on the following:
- i. Net Income
- ii. Other Comprehensive Income
- iii. Equity
Part a (3.5 points)
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution
Concepts tested
- Financial Asset Classification
- Comprehensive Income
- Interest Rate Risk
- Loss Reserve Discounting
- Modified Duration