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April 2008- analysis of EV
- Thread starter 1495_sc
- Start date
In Q2(ii) we can see that the investment income calculation has an amount deducted from it in relation to death claims, and there's no need to do anything in relation to lapses as they are stated to happen at the end of the year.
Do you mean Q2(iv) instead?
In which case, there is no impact on assets in relation to death claims because actual mortality is the same as expected, so there is no experience variance component at all in relation to mortality.
In terms of the lapses, there is no impact on assets because a lapse does not generate any cashflow: the portfolio comprises only term assurance business, on which no surrender values would be payable.
Do you mean Q2(iv) instead?
In which case, there is no impact on assets in relation to death claims because actual mortality is the same as expected, so there is no experience variance component at all in relation to mortality.
In terms of the lapses, there is no impact on assets because a lapse does not generate any cashflow: the portfolio comprises only term assurance business, on which no surrender values would be payable.
Yes 2 iv)
If the question mentioned that actual mortality experience was 0.5% and expected experience was 1%,
assets = liabilities as no free surplus
expected assets = 1202(1+5%)+ (100%-4%)*102,000*(1+5%) -1%*10,000,000*(1+5%)^(0.5)= 1608
to calculate mortality experience variance , actual assets= 1202(1+5%)+ (100%-4%)*102,000*(1+5%) -0.5%*10,000,000*(1+5%)^(0.5) =52,843
hence, mortality variance= 52843-1608= 51,234? Isn't this a very high variance for a 0.5% improvement in mortality experience?
If the question mentioned that actual mortality experience was 0.5% and expected experience was 1%,
assets = liabilities as no free surplus
expected assets = 1202(1+5%)+ (100%-4%)*102,000*(1+5%) -1%*10,000,000*(1+5%)^(0.5)= 1608
to calculate mortality experience variance , actual assets= 1202(1+5%)+ (100%-4%)*102,000*(1+5%) -0.5%*10,000,000*(1+5%)^(0.5) =52,843
hence, mortality variance= 52843-1608= 51,234? Isn't this a very high variance for a 0.5% improvement in mortality experience?
Step back from it: the calculations in part (ii) show that death claims during the year were 100,000 (when actual = expected).
If mortality were actually only half the level expected, that would save the company 50,000. Rolling this up to the year end with investment return gives 50,000 x 1.05^0.5 (deaths occurring halfway through year on average) = 51,234.
This is term assurance business, paying out a high sum assured on each death (and nothing otherwise). So yes, mortality being materially different from what was expected could have a significant profit impact. [It's not really a '0.5% improvement in mortality experience', it's a halving of (50% reduction in) mortality experience relative to expected.]
If mortality were actually only half the level expected, that would save the company 50,000. Rolling this up to the year end with investment return gives 50,000 x 1.05^0.5 (deaths occurring halfway through year on average) = 51,234.
This is term assurance business, paying out a high sum assured on each death (and nothing otherwise). So yes, mortality being materially different from what was expected could have a significant profit impact. [It's not really a '0.5% improvement in mortality experience', it's a halving of (50% reduction in) mortality experience relative to expected.]
Komal Gupta
Active Member
Hi, I did not understand the calculation of lapse impact. If you can explain in a simple manner?
Also,
If lapses are higher than expected, then they will increase PVIF by release of future reserves that was kept aside for the lapsed policies and reduce by loss of future income from these policies & higher per policy expenses.
Also, liabilities will reduce (due to lower reserves) and hence net assets will increase?
Is this reasoning correct?
Also,
If lapses are higher than expected, then they will increase PVIF by release of future reserves that was kept aside for the lapsed policies and reduce by loss of future income from these policies & higher per policy expenses.
Also, liabilities will reduce (due to lower reserves) and hence net assets will increase?
Is this reasoning correct?
Komal Gupta
Active Member
Hi, can you please confirm the above reasoning for lapse?
Not quite, if lapses are higher than expected then there are less policies inforce and so PVIF will fall but net assets will rise due to the release of reserves (as term assurance there is no fall in net assets due to payment of a surrender value). The impact on EV will depend on the size of the reserves being released compared with the size of the PVIF related to those policies.Hi, I did not understand the calculation of lapse impact. If you can explain in a simple manner?
Also,
If lapses are higher than expected, then they will increase PVIF by release of future reserves that was kept aside for the lapsed policies and reduce by loss of future income from these policies & higher per policy expenses.
Also, liabilities will reduce (due to lower reserves) and hence net assets will increase?
Is this reasoning correct?