I
Ivanhoe
Member
Describe how the approach to determining the embedded value would be
different if the contracts were all conventional with profits contracts with
reserves based on a net premium valuation, and shareholder transfers based on a percentage of policyholder reversionary and terminal bonus declarations.
Solu:
The calculation model now needs to project future bonuses, which will likely
be based on the projection of future asset shares. It will need to make
assumptions as to when profits are distributed as bonuses ....
Where the net assets include the excess of asset shares over the reserves then the value to shareholders for this would be in respect of future projected bonuses from these assets in line with how the company believes these will be distributed to the existing policyholders, and this should be consistent with how the rest of the value of in force is calculated.
Net assets would be the excess of asset shares over the reserves. What else could it be? Also how is the meaning of the second para any different from the first one? I understand that asset shares need to be projected, the bonus outflows need to be assumed in line with PRE. Is there anything else that I am missing?
Describe the impact of increasing the level of prudence in the reserves on the
embedded value of both unit-linked and conventional with profits contracts.
Soln:
...... If the company takes the net assets at face value without any “lock in”, then the overall EV would reduce by the cost of holding the additional reserves, since the discount rate exceeds the earned rate. If the company treats all the net assets as “locked in” already the increased prudence would not make any difference.
What do they mean by "lock in" in this context? Why should it matter to the EV?Why is this argument of lock in not provided for Conventional with profits?
For with profits business, the company should be projecting the expected
bonuses based on asset shares. Any release of prudence in the reserves which are more than required to cover the bonuses driven by asset shares would be subject to management discretion in terms of how or when it is distributed.In effect this is no different to the treatment of the excess of the assets less the liabilities, and is unlikely to make a material difference to the EV.
I would tend to believe that as asset share increases, bonuses will be declared which will increase the liabilities. Now, the liabilities are prudent and so although the argument that it is the management discretion to decide what to do with it does hold, the fact remains that they are released later and so the higher discount rate argument should hold and so the EV should decline. I do not quite understand the last sentence of the para above.
Rgds,
different if the contracts were all conventional with profits contracts with
reserves based on a net premium valuation, and shareholder transfers based on a percentage of policyholder reversionary and terminal bonus declarations.
Solu:
The calculation model now needs to project future bonuses, which will likely
be based on the projection of future asset shares. It will need to make
assumptions as to when profits are distributed as bonuses ....
Where the net assets include the excess of asset shares over the reserves then the value to shareholders for this would be in respect of future projected bonuses from these assets in line with how the company believes these will be distributed to the existing policyholders, and this should be consistent with how the rest of the value of in force is calculated.
Net assets would be the excess of asset shares over the reserves. What else could it be? Also how is the meaning of the second para any different from the first one? I understand that asset shares need to be projected, the bonus outflows need to be assumed in line with PRE. Is there anything else that I am missing?
Describe the impact of increasing the level of prudence in the reserves on the
embedded value of both unit-linked and conventional with profits contracts.
Soln:
...... If the company takes the net assets at face value without any “lock in”, then the overall EV would reduce by the cost of holding the additional reserves, since the discount rate exceeds the earned rate. If the company treats all the net assets as “locked in” already the increased prudence would not make any difference.
What do they mean by "lock in" in this context? Why should it matter to the EV?Why is this argument of lock in not provided for Conventional with profits?
For with profits business, the company should be projecting the expected
bonuses based on asset shares. Any release of prudence in the reserves which are more than required to cover the bonuses driven by asset shares would be subject to management discretion in terms of how or when it is distributed.In effect this is no different to the treatment of the excess of the assets less the liabilities, and is unlikely to make a material difference to the EV.
I would tend to believe that as asset share increases, bonuses will be declared which will increase the liabilities. Now, the liabilities are prudent and so although the argument that it is the management discretion to decide what to do with it does hold, the fact remains that they are released later and so the higher discount rate argument should hold and so the EV should decline. I do not quite understand the last sentence of the para above.
Rgds,