(Papers) ACET Paper May 2010 "SA6 – Investment"
You have been appointed as Secretary to the Investment Committee
of a life insurance company. The terms of reference of the investment committee
indicate that the committee has responsibility for overseeing the investment
process of the committee to ensure that appropriate assets are selected to meet
the company’s liabilities in a risk controlled manner and in compliance with
regulation but also to give top quartile performance return to policyholders.
The company has five lines of business:
i) Individual unit linked policies
ii) Immediate annuities, including escalating annuities
iii) Pure term insurance policies (no return of premium)
iv) Watermark unit linked product guaranteeing policyholders, at the end of ten
years, the highest NAV in the first seven years
v) Universal life contract where the earned rate less a margin is credited to
the policyholder, with a guaranteed minimum crediting rate of 2%pa.
As part of your role, you have been asked to prepare a number of
papers to be presented to the investment committee
(a) Prepare an overview of the current Indian economy and
(b) The necessary regulatory changes have been made to allow outsourcing of fund
management activities. The company has decided to consider such an approach and
wish to issue a request for proposal to various fund managers. The company is
considering outsourcing both equity and bond fund management, though discussions
are independent. Set out the procedure you would recommend to the investment
committee for selecting and appointing a fund manager.
(c) The investment committee has asked you to explain the following terms
Growth investment style
Value investment style
Momentum investment style
Contrarian investment style
Rotational investment style
Top –down approach
Bottom –up approach
Passive investing (tracker)
Write brief notes to explain each of these terms
(d) The investment committee has asked you to produce a summary
report on the in-house investment mandate compliance and violations. List the
compliance reports you would review to produce your summary report.
(e) The investment committee has also asked for an Asset
Liability Management (ALM) report on the assets and liabilities of the life
i) Explain what is meant by ALM
ii) How you would implement an ALM approach
iii) How will you apply the ALM for each of the life office’s lines of business
(f) The RBI/Finance Ministry has issued a joint consultation
paper proposing to issue long term index linked government securities and asking
for responses from the banking, insurance & financial services sector . Draft a
response on behalf of your company setting out the features of an index linked
government security and the advantages and disadvantages to the company of the
government issuing such a security.
You work in the investment team of an insurance company as an
Investment Actuary. The company has a significant portfolio of Unit Linked
Insurance Policies (ULIPs) providing various fund options. The company is trying
to compete by providing higher return performance through better investment
strategies (both long term and short term). The company is constantly trying to
understand the investment opportunities in Indian Equities and Debt markets and
available derivatives to make the best out of such opportunities.
You’re presented with various issues which the investment team
likes to consult with you before taking a decision.
The company has a traditional group retirement portfolio
(consisting of gratuity and superannuation funds) of employees in various
companies. This being a traditional portfolio, the company invests the same as
per IRDA regulations. The company management has decided to invest some amount
of the portfolio in equities so as to enhance the returns on the portfolio and
be more competitive. There is an argument in favour of equities citing that the
equity risk premium in India has been historically around 6.5 % and is likely to
be maintained. You feel that the equity risk premium, which is the extra return
expected over the debt returns, is likely to come down in future and a very high
equity exposure may not be warranted. As an investment actuary you have
suggested that the expectations of the customers from this portfolio is to have
a smoothed return and equity component will create volatility, hence the equity
component needs to capped. You’re comfortable with a maximum of 20% of equity
exposure which is well within the maximum allowed by IRDA but you’ve suggested
that the range of equity in the group retirement portfolio should be varied
between 2% to 20% to give appropriate equity exposure depending on the market
You’ve been thinking as to what should be the main criterion to
change the equity proportion from 2% to 20% trying to optimise the value. You
have found that Indian markets have been moving in a P/E ratio range of 11 -25
and have suggested that if the P/E ratio drops to 12 then the investment should
be 20% into equities and when it is 24 it should be reduced to 2% and a table
based on P/E like one given below may be used (the relevant column for Group
Retirement portfolio needs to be considered for the same).
Your company also does a significantly large business through
Unit Linked products sold to Individual policyholders through agents and bank
channel. Amongst many funds offered to your policyholders one is an Index Fund
based on Nifty Index and another is a money market fund.
Your company is contemplating offer a new “fund of fund” option
to policyholders purchasing Individual life policies. In such “fund of fund”
option the policyholder’s money would partly be invested in Index Fund and
partly in the Money Market Fund depending on the P/E ratio of the Equity Index.
The Index Fund exposure at different levels of P/E is given below. Please read
the column relevant for the Individual business from the table based on P/E as