Hello, I have few doubts in the surplus analysis process when we use the new non economic assumptions. 1. The relevant part from Core Reading is below- Run the adjusted model with the new non-economic assumptions to obtain the impact on the surplus from these assumption changes. Ideally, the assumptions should only be changed from the new valuation date so that experience variances are relative to the start-year best estimates. Can someone please explain the part in bold? How does 'Taking this approach to the process will enable the company to identify ‘changes to insurance assumptions’ as a separate item from ‘insurance variances’. 2. Adjust the rolled-forward balance sheet for known differences between actual and modelled non-economic experience over the inter-valuation period (eg if it is known that expenses over the year were higher than expected). Is it referring to purely A/E adjustment? How is this applied to the surplus before we allow for capital injections in the next step of surplus analysis? Thank you!
If we change the assumptions in the model at the start year, and then rolled forward comparing each actual with expected, the 'expected' would be on the new valuation basis (that has been set at the year end) rather than on the previous valuation basis. It's much more useful for the insurer to understand how actual experience differed from expected over the year if 'expected' is what it thought at the start of the year would then happen over the year, not what it now (at the year end) thinks might happen going forwards.
I think this is referring to any other adjustments that need to be made in order to allow for actual experience differing from what has been modelled. For example, when changing expected to 'actual' expenses / mortality rates / lapses during the roll forward, the insurer has to amend parameters in the model in order to achieve that. However, what gets modelled as 'actual' in this way probably won't precisely replicate what has actually happened (due to approximations in the model, timing differences, expense over-runs that didn't fully feed through into the new parameters etc) - so there might need to be some adjustments made in order to 'true up' the year end position. If there have been capital injections, these won't be included in the basic roll-forward of the model. Their impact can be added in at a later step.
