2017 September Q5: Embedded Value on Market-consistent or passive basis

Discussion in 'SP1' started by Jian_901, Sep 16, 2018.

  1. Jian_901

    Jian_901 Member

    Solution to the above question seems to suggest that the claims component in the PVFP is not at all impacted by the change of EV basis from passive to Market-consistent.

    I am not entirely sure why this would be the case, as I thought the change would result in a change in claims assumptions from a "locked in" basis to more of a best estimate basis. That is, the value of claims expected will change.

    Or am I to interpret the EV under the passive basis as the TEV (traditional Embedded Value) which already adopts best estimate assumptions.

    Otherwise I am not convinced at all that the solution is correct. This would include the no change in release of capital as suggested by the solution.

    Please, would you be able to shed some light

    Thanks for your help,
    Jian
     
    Last edited by a moderator: Sep 16, 2018
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi Jian

    I agree with you that we would normally expect a change in the claims assumption from a passive approach (where the assumption is largely fixed) to a market-consistent assumption (where we use the latest best estimate which is likely to be different each year).

    However, the question only explicitly explains how the investment assumption works, so we should expect that the majority of marks should be related to a discussion of investment returns and discount rate.

    The examiners appear to have assumed that claims are already best estimates. I would hope that equal credit would be given for your alternative assumption.

    Best wishes

    Mark
     

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