Analysis of Change Apr 2021 2(ii)

[victoriay24]

Hi, I have attempted the question on analysis of change of BEL in Apr 2021 2(ii), and was thinking on how to answer if the question was asking on analysis of change of S2 Assets instead. I have come up with a rough solution, appreciate if anyone could verify if the components included are correct or anything missed out? Thanks!

Opening adjustments

restate assets to allow for impact due to model changes, regulatory changes etc​

Expected change in assets over period

roll forward allowing for expected investment ret ie 'unwind' of RDR (ie RFR)
- reduce to allow for expected mortality, expenses
- increase to allow for expected inflation on asset values
expected change in assets over period including reduction by amount of expected benefit & expense CF during period​

Economic variances

impact of difference between actual and expected investment return, inflation, exchange rates
may include changes in asset mix eg change in mix between corporate and gov bonds
may include mismatching profits/losses eg due to lack of long enough bond durations
may include impact of asset transactions eg lead to diff impact on matching adjustment​

Changes in assumptions

changes in disc rate used for assets
changes in BE assumptions for future investment returns, inflation and exchange rates​

Experience variances

difference between actual and expected over period:
- expense: if there is expense overruns then assets values drop
- mortality: higher deaths means more death benefit paid out​

Other variances

capital injections into biz
tax relief on premiums or carried forward tax losses​

NB contribution

Assets for any new schemes within period ie premiums received​

 

[Lindsay Smitherman]

It feels as though you might be over-complicating this. Bearing in mind that assets are normally valued at market value for Solvency II, we simply have:

Change in value of assets over year =
actual cashflows in (premiums, any capital injections)
minus actual cashflows out (claims, expenses, tax, dividends)
plus actual investment earnings (investment income + capital gains)

I guess the company could, depending on the purpose of doing such an analysis, split 'actual' into 'expected' and 'actual minus expected' (with 'expected' being based on BEL assumptions?) and it could split out separately all those cashflows that relate to new business written during the period (which would be more than just the premiums).

However, just doing an analysis of change in assets on its own doesn't feel particularly insightful (other than for a data reconciliation exercise). Hence companies perform an analysis of change in surplus, so that offsetting asset and liability impacts can be recognised.

 

[MindFull]

Hi Lindsay,

Regarding the expense variance, why is the BEL impacted by the actual benefit and expense inflation? I understand that actual expenses would come through asset cashflows. I would expect any change in the expense and benefit inflation assumptions (because they are different than expected) to happen at the end of the period so I'm not sure why we would adjust the current period BEL for actual vs expected. I would think that higher than expected benefit inflation on the annuities would result in a higher annuity payment which would flow through from the assets. Where am I going wrong?

Thanks!

 

[MindFull]

Hi (again) lol,

Thinking it through, is it because the actual payment is now higher? So 100 at 5% exp is 105 but actual inflation was 7% so new benefit payment is 107, while the assumption hasn't changed so still 5%?
(If this is so, I can understand it for the annuity payment as it is now permanently 107 but for expenses, it's trickier because I expect the expense assumption to be changed every period anyway.)

 

[MindFull]

Hi Lindsay,

Regarding the expense variance, why is the BEL impacted by the actual benefit and expense inflation? I understand that actual expenses would come through asset cashflows. I would expect any change in the expense and benefit inflation assumptions (because they are different than expected) to happen at the end of the period so I'm not sure why we would adjust the current period BEL for actual vs expected. I would think that higher than expected benefit inflation on the annuities would result in a higher annuity payment which would flow through from the assets. Where am I going wrong?

Thanks!

That should be experience variance*

 

[Em Francis]

Hi Lindsay,

Regarding the expense variance, why is the BEL impacted by the actual benefit and expense inflation? I understand that actual expenses would come through asset cashflows. I would expect any change in the expense and benefit inflation assumptions (because they are different than expected) to happen at the end of the period so I'm not sure why we would adjust the current period BEL for actual vs expected. I would think that higher than expected benefit inflation on the annuities would result in a higher annuity payment which would flow through from the assets. Where am I going wrong?

Thanks!

If expense inflation has been higher (or lower) than expected over the period, the end-of-period BEL will be higher (or lower) than expected as the end of period BEL uses the new inflated expenses and benefits in its projection. Remember, the BEL is about looking forwards, so yes although the assets are impacted, the BEL is also going to be higher than it would otherwise have been because the expense and benefit amounts in the PV are higher than was previously expected.

 

[MindFull]

If expense inflation has been higher (or lower) than expected over the period, the end-of-period BEL will be higher (or lower) than expected as the end of period BEL uses the new inflated expenses and benefits in its projection. Remember, the BEL is about looking forwards, so yes although the assets are impacted, the BEL is also going to be higher than it would otherwise have been because the expense and benefit amounts in the PV are higher than was previously expected.

Hi Em,

Thanks for the reply. I just wanted to confirm that the "updating" of the actual inflation in the BEL wouldn't count as an assumption change (as per the example in my earlier post). It's really that the benefit has changed.

Thanks again

 

[Em Francis]

Hi Em,

Thanks for the reply. I just wanted to confirm that the "updating" of the actual inflation in the BEL wouldn't count as an assumption change. It's really that the benefit has changed.

Thanks again

Yes as it is actual inflation being applied but if the inflation rate used in the future were to change then this would be an assumption change.