Hello Just wanted to clarify that we can explain steps in analysis of surplus in any order as far as we do not miss out logic behind the same or is it expected to produce the steps in the same order mentioned on page 9 of ch-16 AOC? Thanks in advance
Hi It will depend on whether the questions asks for the analysis to be completed in a particular order and/or which direction (ie expected to actual or actual to expected). If not, then yes, as long as you are following the same logic and are consistent. Thanks Em
Hi Em, Something I am not quite understanding in the AoS question at the end of Chpt 16 (part iv). When you step through changing the assumptions from expected to actual why for the expense assumption does the liability side remain unchanged? Should the 30 not change to 25 as well? Thanks
Hi Donal The liability stays unchanged because the valuation expense basis remains at $30 pa for the end of year. The liability will only be impacted by the actual experience if the number of policies inforce change or if there is a change in the valuation basis as a result. Does this help? Thanks Em
Chapter 16 Page 11 Question on surplus categorization. Can someone please explain why are we adding expected investment return of 0.5% on opening surplus (=0.43) for arriving at the surplus arising for the year (=-1.89)? Since we are calculating investment variance on the full value of my assets (200 at start of year), which is made up of my surplus and assets that are used backing BEL. Unable to understand the reason of addition of 0.43 for arriving at -1.89 If someone can help, that would be great!
Hi This is because the investment variance (which you correctly state is calculated on the full asset value) represents only the difference between actual and expected return. The expected investment return on the assets backing the BEL is needed in order to support the increase in BEL that arises from rolling it forward by one year, so that doesn't fall into profit. Only the excess of any actual investment return achieved over the expected level would become profit (or 'surplus arising'). However, the total investment return on the surplus assets falls into profit, as it just increases (provided positive) the amount of surplus held - and thus contributes to surplus arising. As we have counted only the excess of actual over expected in the 'investment return variance' item, we need then to add in the expected return on the surplus assets in order to be including the total return. Equivalently, the company could have calculated the actual return on opening surplus (ie using 4.5% rather than 0.5%) for (a) and then performed the 'investment return variance' step only on the assets backing the BEL (ie on the 113.92). We should still get the same total. Does that make sense?
Thanks for such a prompt response! And your response certainly makes things more clearer in my mind. I was definitely missing the expected return on the opening surplus. Thanks again for your help!
