Hi, Can someone help me in understanding why haven't we considered the impact on assets for lapse/mortality experience variance? We have considered the impact on VIF and reserve only. I am referring to Q2 ii). Thank you,
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.
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?
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.]
