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AoEV question on expense experience variation

I

Iori_

Member
Hi, I'm referring to Sep 2007 Question 2 (i) which relates to analysis of change in EV - "Explain which assumptions could give rise to experience variations and which of these are likely to be most significant".

Some of the assumptions that could possibly give rise to experience variations are the following:

- Mortality
- Withdrawals
- Investment
- Expenses

I understand that variations in mortality and withdrawals during, for example, the past year will impact NAV but also the VIF as there will be less (or more) actual number of policies in-force at the end of the year than expected.

However, for expense variation I'm not sure why the VIF would be impacted per the solution (ASET). I understand that NAV will be impacted as variation in actual and expected expense experience will emerge as surplus/deficit. However, why would VIF change? I would understand if we were dealing with change in expense assumption here, but we are only dealing with expense experience variation. If the actual level of expenses does not change the number of in-force policies at year-end then how can it have an impact on the VIF holding both EV and reserving assumptions constant?
 
Hi I'm not sure I fully understand understand where you're coming (I don't have ASET) from but here are my thoughts.

I think expenses here refers to what the company incurs. The NAV is from the unit fund and company charges management charges or fund charges here to match some of the expenses in non unit fund I.e. fund management fees etc.

So expense variation refers to that in NU fund and so would not concern the NAV. So if there's an expense variation, there will be surplus/ deficit in VIF from NU fund (Expected VIF less Actual VIF).
 
I think you may have the NAV for unit fund and NU fund the other way around. NAV under the unit fund will most likely be allocated to policyholders whereas the NAV under the NU fund is likely to be allocated to the shareholders of the company.

Also, by expense variation we refer to the difference between the beginning of the year expectation of the expenses for the next financial year vs. actual expenses incurred during the financial year. If there is an expense variation, for example, in the past year in the NU fund then that surplus/deficit will affect the NAV that is allocated to shareholders (remember that profits from the NU fund is likely to go to the shareholders of the company).

Remember that change in VIF will come from:

- RDR roll-up
- Assumption changes
- Modelling changes
- Change in actual vs. expected number of policies in-force at the VIF calculation date

When you say Expected VIF - Actual VIF, I think you may need to be a bit more specific. Please let me know how the VIF can change if we are not changing any of the assumptions including RDR and if the number of in-force policies are not impacted by the actual expense experience differing from that expected.
 
I would like to bump this question up in the forum. Please let me know if anybody is able to answer my original question. Thanks!
 
Hi I dont fully understand the question, but thought why would VIF not change if the actual expenses are different with assumed?

VIF is the PV of future income less costs. Expenses are part of the costs, so if actual expenses turn out to be higher than expected, then VIF changes?


Iori_ said:
Hi, I'm referring to Sep 2007 Question 2 (i) which relates to analysis of change in EV - "Explain which assumptions could give rise to experience variations and which of these are likely to be most significant".

Some of the assumptions that could possibly give rise to experience variations are the following:

- Mortality
- Withdrawals
- Investment
- Expenses

I understand that variations in mortality and withdrawals during, for example, the past year will impact NAV but also the VIF as there will be less (or more) actual number of policies in-force at the end of the year than expected.

However, for expense variation I'm not sure why the VIF would be impacted per the solution (ASET). I understand that NAV will be impacted as variation in actual and expected expense experience will emerge as surplus/deficit. However, why would VIF change? I would understand if we were dealing with change in expense assumption here, but we are only dealing with expense experience variation. If the actual level of expenses does not change the number of in-force policies at year-end then how can it have an impact on the VIF holding both EV and reserving assumptions constant?
Click to expand...
 
Actual expenses by implication refer to actual expenses from actual experience.

VIF by definition is the present value of future profits from the current in-force business.

The difference between the actual and expected expenses will translate as surplus on the NAV side when EV is calculated.

Actual profits (NAV) are no longer future profits (VIF).
 
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