Hi, I want to confirm the following- In analysis of surplus (say surplus = assets- BEL over the year), Change in economic assumptions (inflation and discount rate/investment return return)- it will affect both assets and BEL Change in non economic assumptions (at year end only)- it will only affect BEL Economic variance- it will affect only assets (as actual investment return can be higher or lower than expected) Non economic variance- it will affect both assets and liabilities , except for expense variance which will affect only assets. In analysis of EV (shareholder owned net assets + PVIF) Change in economic assumptions - affects PVIF and net assets (both assets and BEL) Change in non economic assumptions (year end)- affects net assets (due to change in BEL only) and PVIF Economic variance- it will affect PVIF and Net assets (assets only) Non economic variance- it will affect net assets (assets and BEL) and PVIF, expense variance will not affect BEL Actual impact also depends on which products are in force- For term product, lapse variance will only affect BEL and PVIF as there is no benefit outgo on lapse hence asset is not affected For savings product, lapse variance will affect BEL, PVIF and assets as there is a surrender outgo for savings products. Also, when considering the impact separately on PVIF and shareholder net assets- is there a need to breakdown net assets into free surplus +required capital less cost? Or we simply think of impact on assets and BEL ? Thank you!
You seem to have a sound understanding. However a few points to note: Economic variance: Also be mindful that the change in economic variance could include actual spread movements relative to those allowed for in the adjustment to the discount rate, eg if the discount rate includes a matching adjustment which should reflect the actual spread from backing assets. The variance could then include the difference between the matching adjustment and the company’s actual experience in relation to the credit risk spread. However, if completely matched, then the only economic variance coming through would be the change in the assets backing the surplus. Assumption variance: For EV: change in assumptions will depend on what basis you are looking at. Change in EV/projection basis will impact only PVIF, whereas a change in valuation basis will impact PVIF and net assets (as the reserve will change). And in answer to your question regarding splitting net assets: the question should make it clear what it means by net assets. If it doesn’t and there is information about the required capital, then I would suggest breaking net assets down into required capital and free capital. Hope this helps. best of luck
