Hi
Can someone explain the following
"For without profits business change of EV is effectively the release of margins within supervisory reserves, relative to assumptions used in embedded values"
Not really seeing this, as surely there are other elements that effect the EV, such as the net assets?
Or is it talking about the EV at t and t+1 where you experience the release of reserves?
Hi Kiran
Yes, the change in the EV is the EV at time t+1 less the EV at time t.
However, this question is about the calculation of the EV at time t, rather than the change in the EV over the year.
I'm not sure where you have taken this quotation from. The Examiners Report says:
"For without profits business EV is effectively the release of margins within supervisory reserves, relative to assumptions used in embedded value."
so note that this makes no reference to the change in EV, it is only looking at the calculation of the EV at a given time.
This line in the Examiners Report is taken directly from the Core Reading in Chapter 15 at the bottom of page 13. The ActEd text at the top of page 14 then explains this as follows:
"If the assumptions used to calculate the supervisory reserves (such as the expected rate of return on assets), were exactly the same as the future experience assumptions used to calculate the future cashflows in the embedded value calculation, then the profit emerging in each year would be zero. This is because the reserves plus the expected investment income would be of exactly the right amount to cover the expected net outgo in each future year.
Therefore, the extent to which the two bases are different will lead to a profit or loss in each year within the calculation of the present value of future profits. Because the embedded value calculation is generally on a more realistic basis than the reserving basis, the reserves plus the expected future investment returns should be more than enough to cover the estimated future outgo, leading to the expectation of positive future profit."
Best wishes
Mark
