Hi Mark,
Sorry I didn't get the chance to respond to this over the week.
Although the question focuses on the backing assets for these products, I am still trying to understand why the demographic assumptions do not change. Although not explicitly hinted in the question, I believe it has an impact on the PVIF.
The wording of the question mentions "passive" "embedded value basis", so this would imply it is the EV basis rather than reserving basis that changed.
However, the word "passive" to "market consistent" basis leads me to thinking it is changing from a passive to active basis (Active approach is actually a market consistent one), which will be a nice follow up from question part (i).
If I view "passive/active embedded value" similarly as "passive/active valuation" as in the notes, this would imply the demographic assumptions will be changed since:
- Under passive approach, the demographic assumptions are not updated unless experience worsens (page 18, chapter 22)
- Under Market consistent approach, demographic assumptions are set to be consistent with market values, in a way a Best Estimate assumption. (page 10, chapter 22)
From this perspective, the current demographic assumptions will be out of date, changing it to best estimate will make it worse (as experience generally deteriorates).
Could you clarify my confusion here?
Thanks,
Trevor
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