Hi lindsay
is the cost of guarantee you mentioned above is time value of guarantee?
suppose i did 100 simulation of asset share for a business portfolio for 1year(assuming one year is left for the business portfolio). For each simulation, payouts are determined assuming 100% of projected asset share(no smoothing) . Now in 100 simulation, 50 projected asset share are less than the guarantee built up till valuation date such that average of difference between guarantee sum assured minus projected asset shares over 100 simulation is positive.
So the bel would be the average asset share plus cost of guarantee(with one year of discounting at risk free rate).
Is my calculation right?
If yes, i have three questions:
1. should i take BEC(Bonus earning capacity) rate as reversionary bonus for the left one year, before comparing with projected asset share ?
2.the cost ot guarantee calculated above is intrinsic value of guarantee or time value of guarantee ? i believe it is intrinsic value because is the best estimate(average) . if you agree, then should time value be somewhat greater than average value, say 75th percentile of the cost distribution ?
2. given the valuation is under SII, should the asset share in stochastic model be projected under risk free rate(as it is the assumed investment return under sii) ?
Last edited by a moderator: Mar 3, 2018