Analysis of Change Apr 2021 2(ii)

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​

 

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!

 

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.)

 

That should be experience variance*

 

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