Finding the price when purchasing a company or block

[studentactuary15]

Hello,

The older exam papers seem to always ask this idea of purchasing a block or business or a whole company, eg Q3i on both April 2008 and September 2009. Then it asks for considerations for when they determine a price. The mark schemes tend to imply to start off with the PVIF or the EV (correct me if I am wrong here).

In our syllabus, what is the way that we should use as a starting point? If we (X) want to buy company Y, do we use the starting point with SII? So this is BEL + RM. Or do we use surrender values for the block of business we want to buy. Or do we use PVIF (or EV if we want to buy the whole company)? We are effectively finding some type of transfer value.

Of course, then we need to consider other aspects like one off expenses, synergies, tax, risks, practicality, etc.

Thank you

 

[Lindsay Smitherman]

Prior to Solvency II, the value of portfolios would be determined using an EV (or appraisal value) basis, so that is what you will see in those earlier exam papers.

If a company is subject to Solvency II, it now doesn't necessarily have to calculate an EV. As you suggest, it might well simply start from technical provisions as the amount that needs to be transferred across (remembering what the definition of technical provisions is), and then apply various adjustments - including those that you mention and various others as applicable (eg value of new business, profits arising beyond contract boundaries - that would otherwise be ignored).

Which approach should be used in the exam? It really depends on the context of the question. For example, in the Sept 2017 and April 2018 papers it was clear that we needed to start from the Solvency II balance sheet rather than the EV approach.