B. The following questions ask you about the new businesses Matlifer in the 2010s. The interest rate is constant but at a much lower level of 2%. Matlifer is offering two modern products: variable life insurance and variable annuities. Matlifer invest their collected premium and their capital in the S&P 500 stock index. Variable life insurance differs from traditional life insurance that the return credited to the cash value fluctuates is: interest rate+1/2*(S&P stock index return-interest rate), with a minimum guaranteed rate of 3%. Variable annuities differ from traditional annuities in that the return credited to the contract is: interest rate+1/2*(S&P stock index return-interest rate), with a minimum guaranteed rate of 3%.

(e) If the S&P stock index return is 5%, what is the return credited to the policy for Matlifer?(2%)

(f) If the stock market return is 1%, what is the return credited to the policy for Matlifer (2%)

(g) If the variable annuities do not provide a minimum guaranteed return, will your answer to (e) and (f) be smaller, unchanged, or larger? Explain. (2%)

(h) In the year of 2015, a big insurer whose business is similar with Matlifer is designated as a systemically important financial institution (SIFI). The designation means more stringent regulation. Can you provide a rationale for why the insurer is designated as SIFI and needs more stringent regulation? (6%)