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new business contribution in Analysis of change in EV

Discussion in 'SA2' started by qinfen, Sep 16, 2015.

  1. qinfen

    qinfen Member

    In the solution for April 2015 exam, ASET, qn 2 part iv, there is a difference for this component under solvency I and II. Why is there such difference? what is the relavent rules/regulation under　ｓｏｌｖｅｎｃｙ　Ｉ and II which makes the difference in calculation?
     
    qinfen, Sep 16, 2015
    #1
  2. Em Francis

    Em Francis ActEd Tutor Staff Member

    The question is asking for the differences in the analysis of change in EV using the described approach given in the question compared to the standard approach.

    The NB under the standard approach will be the impact from setting up the New business:
    Free surplus contribution from NB (essentially premium - expenses - required capital - cost of holding required capital) + required capital + PVIF from this NB item.
    Under the new approach. The contribution would also be the Free surplus contribution from NB (essentially premium - expenses - required capital - cost of holding required capital) + required capital. The main difference is the PVIF but as discussed in part i this shouldn't cause a big issue due to BEL containing best estimate assumptions.

    Hope this helps.

    Thanks
    Em
     
    Em Francis, Sep 17, 2015
    #2
  3. qinfen

    qinfen Member

    Thanks for your explanation.
     
    qinfen, Sep 18, 2015
    #3
  4. User 1234

    User 1234 Active Member

    Hi EM, do we need to deduct the BEL (S2) / Reserves (S1) under the Free surplus contribution i.e. (essentially premium - expenses - BEL/Reserves - required capital - cost of holding required capital) ? Thanks
     
    User 1234, Oct 20, 2021
    #4
  5. VishalKumar

    VishalKumar Keen member

    One more query on the above equation that whether it should be change in BEL & change in Reqd capital ie BEL @t - BEL @t-1 and RC@t -RC@t-1
    And how does the cost of reqd capital calculated, is it just the opportunity cost of holding this capital or ( increase in capital + BE interest earned on capital- the tax paid on this interest earned on capital).
     
    VishalKumar, Oct 22, 2021
    #5
  6. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Yes - I agree with you.

    For a non-Solvency II traditional EV the immediate NB impact on EV is the extra VIF plus the net asset impact, where the latter equals:
    + Initial premiums - Initial expenses - Reserves (and possibly also - Solvency capital requirements, depending on the definition of 'net assets', with these then being released in the VIF)

    For a Solvency II EV performed under EEV/MCEV principles the immediate NB impact on EV is VIF, if relevant (this question is assuming it to be zero), plus (noting that the question implies that the company is defining 'required capital' as the sum of RM and SCR):
    • the impact on free surplus = + Initial premiums - Initial expenses - BEL - RM - SCR
    • the impact on {required capital - COHRC} = + RM + SCR - COHRC
    For the immediate NB impact, the above BEL, RM, SCR would be as at time zero (ie the day the new policies are written). For the period end NB impact, they would be as at that valuation date, and we would also have investment earnings (from inception to the valuation date) included in the free surplus figure.

    Hope that helps to clear that up.
     
    Lindsay Smitherman, Oct 25, 2021
    #6
  7. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    We are considering here the new business contribution component of the change in EV, ie the contribution to the period end EV from new business written during the year. So the 'change in BEL' is simply the BEL for the new policies, since at the start of the period (time t-1 in your notation) these policies have not yet been written.
     
    Lindsay Smitherman, Oct 25, 2021
    #7
  8. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    It is the opportunity (or 'frictional') cost of having this capital locked in.
     
    Lindsay Smitherman, Oct 25, 2021
    #8

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