Ch18 - Embedded Value

[Mr.DCSia]

Hello,

On page 569, it states that:

It is important to remember that there are two bases required for EV calculations:
- the projection or experience basis ·
- the supervisory valuation basis used to project liabilities (and future capital requirements, if relevant).
Both are required in order to project future profits for the PVIF component, and changes in either can therefore contribute to changes in that part of the EV.

I would like to understand,
1. A brief description/difference between the 2 basis
2. Which part in the PVIF will require the supervisory valuation basis? Is it the change in reserves portion?

Thanks in advance!

 

[Em Francis]

Hello,

On page 569, it states that:

It is important to remember that there are two bases required for EV calculations:
- the projection or experience basis ·
- the supervisory valuation basis used to project liabilities (and future capital requirements, if relevant).
Both are required in order to project future profits for the PVIF component, and changes in either can therefore contribute to changes in that part of the EV.

I would like to understand,
1. A brief description/difference between the 2 basis
2. Which part in the PVIF will require the supervisory valuation basis? Is it the change in reserves portion?

Thanks in advance!

Hi
I hope the following helps with your two questions above:

1. This is SP2 knowledge so it might be worth going over your SP2 notes. The projection basis used is the expected future experience and is usually taken as realistic/best estimate, unless more prudence is needed for the particular purpose for which the embedded value report is required. The reserving basis is determined by which ever jurisdiction you are under, eg Solvency II for EU and equivalent countries.

2. The PVIF will contain the release of prudent margins from the reserves, ie the excess of the assets required to cover the supervisory liabilities over the realistic projection of the assets and liabilities.