Matlifer is a stock life insurer that sells both life insurance plans and annuities.The following questions ask you about the traditional business Matlifer was doing back in the 1980s. The interest rate is a constant 10% in each period and Matlifer invests all collected premium and their capital at the risk-free interest rate.

(a) What is the major risk that Matlifer is exposed to? (2%)

(b) What benefits can people get from annuities compared to saving on their own in the same financial instrument, i.e., the risk-free rate in this question? (2%)

(c) What is on the asset side of Matlifers balance sheet? What is on the liability side of Matlifers balance sheet? (2%)

(d) Policyholders of insurance policies and annuity policies can surrender their plans subject to a surrender charge. Do Matlifers assets increase or decrease when policyholders surrender their plans? Do Matlifers liabilities increase or decrease when policyholders surrender their plans? (2%)

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%)