Hi Em, In the first part of the solution, one of the points state that profit or loss can result if the basis for the estate investigation is done more frequently than the pricing assumptions. I'm not sure why other than the fact that doing the investigations more often means that any adverse (?) changes in experience would take longer to be corrected? Thanks!
Hi If we think of profit or loss arising being due to actual being different to expected, if our expected is the basis, and if this changes (ie from pricing assumptions to another set of assumptions) we would expect to see differences in actual vs expected and therefore some profit or loss arising. Thanks Em
Hi Em, Thanks for clarifying. I'm still a bit stuck on the part that speaks about the basis being reviewed more frequently than the updating of pricing assumptions. Does the frequency influence the amount/sign of the surplus? Also, I would always expect profit/loss to arise from expected vs actual in all circumstances. Is there something special about the analysis re the estate? Thank you!
Hi (again)! For the last 2 parts of the question - keeping the estate the same percentage of WP asset shares and keeping it the same absolute amount: 1. UL unit liabs are small but what about the conventional without profits block? (Noted that little new business is being sold for both but not sure how it applies) 2. Why would maintaining the current estate not be a long term solution? Thank you!
Sorry, maybe I have added confusion within my last comment. We have been asked for the contribution to the estate from new business strain. New business impacts on surplus if the liabilities differ from the assets accrued in respect of new policies (premiums less initial outgo, plus investment return to the valuation date). The premiums are derived from the pricing assumptions and the liabilities are derived from the assumptions used in the estate valuation. So even if these are both best estimate assumptions, if the latter is reviewed more frequently then there will be a difference, resulting in surplus arising, ie profit. Yes, but the profit / loss is only recognised when there is any analysis and, in this question, the analysis is of the estate.
Ah sorry, I missed these parts. 1) Without profit policyholders should not benefit from the inherited estate as they are without profits and benefits are guaranteed. (Is that what you were asking?) 2) The company needs to maintain a sufficient degree of surplus capital (the estate) within the fund in order to protect against risks and to support solvency capital requirements. These things change over time as the policies change. And so maintaining the current absolute value wouldn't be appropriate as it doesn't take account of policies (including number of policies) changing. And as the company is only writing 'limited' new business, the number of policies inforce are expected to fall. There is also the risk of the tontine effect. (This is all explained in Chapter 20 under 'Pace of distribution'.)
