Analysis of surplus April 2013 Q1 (ii)

[smSA2]

I have a question on April 2013 Q1 (iii). In the examiner’s report, expected valuation rate of interest margin of 2.5% is used.

Expected unwind/release of the valuation rate of interest margin of 2.5%

= .025 × 5.60% × 5,200

1- How is this 2.5% interest rate margin determined?

The impact on movement in yields on the asset side makes sense to me but for liabilities a value of 5,088 is used.

The impact on liabilities from a 1% movement in yields is the difference between the expected and actual values,
i.e. a decrease from expected 5,088 to 5,088 × (1.0546/1.0646)13 (= 4,500) = 587 profit

2- How is this figure of 5,088 calculated?

 

[Em Francis]

I have a question on April 2013 Q1 (iii). In the examiner’s report, expected valuation rate of interest margin of 2.5% is used.

Expected unwind/release of the valuation rate of interest margin of 2.5%

= .025 × 5.60% × 5,200

1- How is this 2.5% interest rate margin determined?

Hi
This is derived from the Solvency I rules that the valuation discount rate cannot be more than 97.5% of risk adjusted assets held. ie the margin is 100%-97.5%. You wouldn't be expected to know this now.

The impact on movement in yields on the asset side makes sense to me but for liabilities a value of 5,088 is used.

The impact on liabilities from a 1% movement in yields is the difference between the expected and actual values,
i.e. a decrease from expected 5,088 to 5,088 × (1.0546/1.0646)13 (= 4,500) = 587 profit

2- How is this figure of 5,088 calculated?

If experience had been as expected in the valuation basis (ie that the investment return had been 5.46% pa), and the basis had not changed:
Then EOY(A) = EOY(L) = (Solvency I liab * valuation disc rate)-annuities paid out at EOY
= (5,200*(1+(97.5%*(6%-0.4(6%-5%)))))-(400*0.99)
= (5,200*1.0546)-396=5,088