AOS Basics

Hi

I wanted to check my understanding on some of the basics (to make sure I've understood what we view as expected and that I'm using the right valuation basis, particularly in rolling forward liabilities):

1) Working from E to A:

1.1) This involves rolling forward the assets and liabilities using start-year valuation assumptions (since these constitute what is expected to happen). On the liabilities side, this could be calculated as (per-policy V1) x (number of lives alive at the start) x (probability of being alive at the end, where px is based the start-year valuation basis), where V1 is the liability at the end of the year on the start-year valuation basis (?)
1.2) Each item then needs to be changed, in turn, from E to A (what happened over the year) which gives the surplus arising due to experience in the year being different from that assumed in the valuation basis
1.3) The A is then changed, in turn, to the end-year valuation assumptions to arrive at the surplus arising due to assumption changes
​

2) When working from A to E:

2.1) This involves rolling forward the assets and liabilities using what actually happened over the year. On the liabilities side, this could be calculated as (per-policy V1) x (actual deaths over the year), where V1 is the liability at the end of the year on the start-year valuation basis (?)
2.2) Each item then needs to be changed, in turn, from A to E (where E is the assumptions from the start-year valuation basis) which gives the surplus arising due to experience in the year being different from that assumed in the valuation basis
2.3) The E is then changed, in turn, to the end-year valuation assumptions to arrive at the surplus arising due to assumption changes​

In either case, the return on opening surplus can be calculated either using:

(a) actual returns over the year (in which case, the assets that we've rolled forward above should exclude the opening surplus - i.e. use that part of the assets backing the liabilities)
(b) expected returns over the year (in which case, the assets that we've rolled forward above should include the opening surplus))
​

Thanks in advance!

 

Hi Mbotha
Yes your understanding is correct and that is one way you could do it.
Alternatively 1.2 and 1.3 could be combined or 1.3 could be carried out before 1.2 (and likewise 2.2 and 2.3 could be combined and 2.3 could be carried out before 2.2). The key is to be consistent from year to year.
Don't forget to make any opening adjustments at the start and add in any new business written in the period to the rolled forward balance sheet.

 

Thanks!!