When plotting consumption (Cd

) and investment (I

d

) demand curves with interest rate (r) on

the vertical axis, Cd lies to the right of I

d

, and I

d is relatively flatter than Cd

. These arise from

the stylized facts that consumption has a ______ contribution to GDP than investment, and

consumption is ______ than investment.

a. larger ; more volatile

b. larger ; less volatile

c. smaller ; more volatile

d. smaller ; less volatile

(12 points) PCLC is a US life insurance company that sells primarily single premium immediate annuity (SPIA). PCLC uses only the statutory capital basis to manage the risk profile. You are the head of enterprise risk management (ERM) and are interested in using a principles-based economic capital approach for managing the risks. (a) (I point) Assess the treatment of the key risks for SPIA under each of the following: (i) Economic capital (ii) Statutory risk-based capital (b) (3 points) Critique the following statements related to the capital needed for PCLC's SPIA product: A. VaR is preferable over CTE because it recognizes and allocates diversification benefits. B. The liability runoff approach uses the preferred time horizon because of the importance of finding the amount of capital today that will provide sufficient protection for the lifetime of the portfolio. C. The use of an economic valuation method provides the best assessment of risks across different companies and countries regardless of any regulatory or accounting framework. D. If PCLC holds 400% of total RBC for its SPIA block the surplus will be sufficient to cover all the future benefits.The team provided you with the following information for the SPIA block: Reserve and Capital Statutory Reserve 99 Statutory Capital for Asset Risk 2 Statutory Capital for Longevity Risk Stochastic Economic Liability Economic Liability Simulation discount at 5% discount at 4.5% 1 109 111 108 110 107 109 06 108 105 107 100 102 101 103 8 102 104 103 105 10 104 106 Stochastic mortality simulation is used for quantifying the longevity risk The economic reserve is the mean of all stochastic simulations Assets supporting SPIA earn the statutory interest rate of 5% PCLC enters into a total return swap that costs 0.5% to eliminate the asset risk The 90" percentile is the economic capital measure of the company Assume no correlation (c) (5 points) (i) Calculate the economic capital for PCLC's asset and longevity risk. Show all work. (ii) Explain the relationship between the statutory capital and economic capital for asset risk. (iii) Explain the relationship between the statutory capital and economic capital for longevity risk.(d) (3 points) (i) Construct a multi-tiered capital objective for PCLC assuming it takes a statutory view. (ii) Explain how the multi-tiered capital objective would be different if PCLC took an economic view