Alterations

Hi,
I am bit confused .. this is section 4.1 of Chapter 22, Alterations
There is this line "The profit ‘released’ at the date of alteration will be:
the full expected profit under the unaltered contract, if a realistic prospective value
is used for the policy value before alteration"

Can anyone please explain how can we expect the full expected profit if we are using BEst estimate of assumption. If we are assuming best estimate that means our future xperience is more in line with best estimate assumption which leaves less or zero possibility of future profit. Then how come we expect full profit ?

 

Thanks Mark. This makes sense.

 

Hi Mark,
I think I have essentially the same question, so would like to double check my understanding. I think it is maybe similar to the arguments in Chapter 21, Section 5.2 where the retention of profit on surrender is described?

If we calculate the old policy value using a realistic prospective basis then it is

Expected claims on realistic basis + future expenses on realistic basis - future premiums (which included margins) (1)​

If we calculate the old policy value using a prospective basis which also includes margins then it is

Expected claims on prudent basis + future expenses on prudent basis - future premiums (which included margins) (2)​

The first two elements are larger than in (1), the premiums are the same.
So here we have a larger "old policy value" if using a basis with margins rather than best estimate?

Profit released will be:
Earned asset share - prospective value
So using (1) will give a large profit release than using (2)?

 

Hi, I am sharing my understanding.

Using 1 will give lower value of reserves as the rationale behind using Best estimate is to reduce the value of liabilities/reserves.

Using 2 will give higher reserves as more margins will increase the liabilities.

So, it should be correct to say that deducting the value of 1 from asset share will give higher profit. But let's have Mark's view on the same.

 

This definitely makes too much sense. I mean my answer was the impact on reserves but as mentioned there will be impact on PV of premiums/benefits too.