Ch 17 - Variable Fee Approach

[kluless]

Hi,

What are the examples of "variable fee" under VFA approach? For unit-linked, I suppose fund management charges (FMC) are considered variable fee while policy fee or charges for cost of risk benefits are not, is this right?

Also, in pg 15 under para 2 of the VFA section, it states that the variable fee is a transfer of funds within the insurer and so not part of the fulfillment cashflow and BEL. Can someone please help to explain what this means? Say if fund management charges (FMC) are indeed variable fee, it should be be considered part of the non-unit component and thus the BEL?

Thanks!

 

[Franners81]

Hi,

What are the examples of "variable fee" under VFA approach? For unit-linked, I suppose fund management charges (FMC) are considered variable fee while policy fee or charges for cost of risk benefits are not, is this right?

Also, in pg 15 under para 2 of the VFA section, it states that the variable fee is a transfer of funds within the insurer and so not part of the fulfillment cashflow and BEL. Can someone please help to explain what this means? Say if fund management charges (FMC) are indeed variable fee, it should be be considered part of the non-unit component and thus the BEL?

Thanks!

Hi
To think of the following may help:

Variable fee (VF) represents the fee payable to the insurer. When thinking of a UL policy , the VF is the PV of the non-unit cashflows, ie the NUR:

VF = PV future AMC – PV expenses/guarantee costs

The VF comprises the company’s share in the fair value of the underlying items (ie AMC) less cash flows payable to the policyholder that do not vary based on the underlying items (ie g'teed benefits).

In answer to your second query, IFRS 17 BEL is not exactly the same as Solvency II BEL. And for UL contracts, the BEL would only consist of the unit reserve net of the VF.
I see the IFRS balance sheet looking like:
BEL of unit reserve
+RA
+ CSM (=VF)

 

[Mateusz]

Hi
To think of the following may help:

Variable fee (VF) represents the fee payable to the insurer. When thinking of a UL policy , the VF is the PV of the non-unit cashflows, ie the NUR:

VF = PV future AMC – PV expenses/guarantee costs

The VF comprises the company’s share in the fair value of the underlying items (ie AMC) less cash flows payable to the policyholder that do not vary based on the underlying items (ie g'teed benefits).

In answer to your second query, IFRS 17 BEL is not exactly the same as Solvency II BEL. And for UL contracts, the BEL would only consist of the unit reserve net of the VF.
I see the IFRS balance sheet looking like:
BEL of unit reserve
+RA
+ CSM (=VF)

A follow-up question - speaking of a standard UL policy, do cash flows not payable to the policyholder but normally included in the non-unit BEL calculation (for example commission, directly attributable expenses, etc) meet the definition of the "variable fee"? My understanding is that yes, they do, but have to admit the wording of par B104 of the Standard can be a little confusing - it mentions that an obligation to the policyholder is the sum of the FV of underlying items less a variable fee, so literally one could interpret this to mean that cash flows which do not vary with the underlying items and not payable to the PH are not part of the variable fee.

 

[Viki2010]

not all cash flows included in the non-unit BEL would be variable fees

 

[dimitris13]

the hard part will be how to isolate all these in terms of modelling. what to include and what not.
and on top of that how to calc the csm (eg. externally or in the model)

 

[Mateusz]

not all cash flows included in the non-unit BEL would be variable fees

If so, then I'm confused why we need to distinguish between:

a) fulfilment cash flows which do not vary with the underlying items and are part of the variable fee
b) fulfilment cash flows which do not vary with the underlying items and are not part of the variable fee

I understand why we may want to split out the entity's share - all of the changes in this share (including experience variances) will unlock the CSM, which may not true of the other component of the variable fee. However, I think the treatment of (a) and (b) cash flows as defined above would be the same under the VFA model. The Standard basically directs the reader to the general model case (i.e. to assess which changes should unlock the CSM and which not), with the key difference being that these changes are measured using current rates of interest. Could anyone explain what the above split actually achieves?

 

[Lindsay Smitherman]

A follow-up question - speaking of a standard UL policy, do cash flows not payable to the policyholder but normally included in the non-unit BEL calculation (for example commission, directly attributable expenses, etc) meet the definition of the "variable fee"? My understanding is that yes, they do, but have to admit the wording of par B104 of the Standard can be a little confusing - it mentions that an obligation to the policyholder is the sum of the FV of underlying items less a variable fee, so literally one could interpret this to mean that cash flows which do not vary with the underlying items and not payable to the PH are not part of the variable fee.

Hi - I agree that the wording of the standard is confusing.

FWIW franners81's statement that {VF = PV future amc - PV expenses/guarantee costs} is consistent with common interpretation, as far as I can see. That is despite, as you say, expenses not really being 'variable cashflows' in the way in which the VFA defines them.

For the exam, you wouldn't be expected to know more than they are telling you in the Core Reading (and they don't tell you there exactly how it is determined). But thinking about the VF as being the (negative) non-unit reserve can be helpful in getting your head around this particular approach.

 

[1495_sc]

I did not understand why variable fee is not a part of fulfilment cashflow. Can someone please elaborate in simple terms?

 

[Lindsay Smitherman]

I wouldn't get too hung up on this - it's just phrasing. Basically, the variable fee comprises shareholder cashflows (PV of charges less expenses) rather than policyholder fulfilment cashflows.