2015 September Q1iii) - Impact on EEV

Hi,

For question Q1iii), it's about the impact on EEV when entering into a reinsurance arrangement with single premium P, corresponding to a liability of 1000m. I understood from the answer that the impact of net asset would be 1000m-P, this would reflect the (release of prudential margin in insurer's reserve) - (reinsurer's profit margin in P). Furthermore, the PVIF would became 0, so the impact on PVIF would be -(release of prudential margin in insurer's reserve). Ultimately, the impact on EEV would be -(reinsurer's profit margin in P).

I tried to explore a bit more if the reinsurance arrangement has changed to regular premium, P1. The P1 would then expect to be much more smaller than the single premium P above. Am I right that,
1. the asset would reduce by P1, while the liability would reduce by 1000m. So the impact on net asset would expect to be 1000m-P1, which would be significantly large given the P1 would be small.
2. while for PVIF, I'm still thinking it would be 0, given there is no longer any prudential margin to be released. So the impact on PVIF would still be -(release of prudential margin in insurer's reserve).

So, does that mean the net impact on EEV would be (significant large amount from 1000m-P1) - (release of prudential margin in insurer's reserve)? It seems there are something missing regards the reinsurance regular premium. How does the reinsurance regular premium would come in place? Could you supplement a simple numeric example in this case?

Thanks,
Chris

 

I have similar thoughts too, appreciate if the tutor could enlighten us. Additionally, wondering if transferring a whole block of business to RI will cause the PVOF=0 be proven mathematically based on the PVIF formula?

 

Thanks Francis, that's make sense. Furthermore, I have an additional question on 2016 September Q1 vii). It asked about 5 distinct type of trust that could used to hold death benefit, as an initiative to benefit policyholder from tax perspective. However, I couldn't find any notes regarding this in CMP. Is this out of scope?

Best, Chris

 

Appreciated your comment!