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April 2015 Question 2(i)

T

Tong_Tong

Active Member
Hello,

In the question it said that "If the impact of the matching / volatility adjustment under Solvency II is the same as the liquidity premium under MCEV, then there will be no emergence of future profits (or losses)."

My question is why would it matter? If i want to see the EV in SII why would I care if the MA is different to illiquidity premium?
 
There will be future profits included in the PVIF component of the EV if the investment return assumed in the EV projection (experience) basis is greater than the investment return assumed in the reserves held.

Under MCEV, the former will be the company's own risk-free rate assessment, including whatever liquidity premium they themselves believe to be appropriate. And if the reserves (provisions) held are determined under Solvency II, the latter will be the risk-free rates set by EIOPA and any MA/VA that the co has been permitted to hold - where this MA/VA would also be (at least partly) set by EIOPA.

So there could be a difference between the two sets of investment return assumptions, and hence there could be some PVIF in respect of expected investment profits.
 
Lindsay Smitherman said:
There will be future profits included in the PVIF component of the EV if the investment return assumed in the EV projection (experience) basis is greater than the investment return assumed in the reserves held.

Under MCEV, the former will be the company's own risk-free rate assessment, including whatever liquidity premium they themselves believe to be appropriate. And if the reserves (provisions) held are determined under Solvency II, the latter will be the risk-free rates set by EIOPA and any MA/VA that the co has been permitted to hold - where this MA/VA would also be (at least partly) set by EIOPA.

So there could be a difference between the two sets of investment return assumptions, and hence there could be some PVIF in respect of expected investment profits.
Click to expand...

Lindsay Smitherman said:
There will be future profits included in the PVIF component of the EV if the investment return assumed in the EV projection (experience) basis is greater than the investment return assumed in the reserves held.

Under MCEV, the former will be the company's own risk-free rate assessment, including whatever liquidity premium they themselves believe to be appropriate. And if the reserves (provisions) held are determined under Solvency II, the latter will be the risk-free rates set by EIOPA and any MA/VA that the co has been permitted to hold - where this MA/VA would also be (at least partly) set by EIOPA.

So there could be a difference between the two sets of investment return assumptions, and hence there could be some PVIF in respect of expected investment profits.
Click to expand...

Thanks Lindsey,

Just to clarify. If we are moving from MCEV to EV under SII. The difference in illquidity premium and MA will be the VIF. The difference cannot be categorised under the free surplus as the amount of money has are not yet currently available.

Also when you say reserves, you really mean BEL +RM?

Thanks
 
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Tong_Tong said:
Just to clarify. If we are moving from MCEV to EV under SII.
Click to expand...

I'm not quite sure what you mean by 'moving from MCEV to EV under SII'. The SII bit relates to the supervisory balance sheet, which forms the starting position for an EV calculation. The balance sheet will be determined using whatever regulations apply in a particular jurisdiction, ie Solvency II or whatever. The EV calculation itself can be done using any approach: traditional, EEV or MCEV, irrespective of what the balance sheet is determined under.

In the specific past exam question that you refer to, the company has a Solvency II balance sheet and produces its EV using an MCEV approach.
 
Tong_Tong said:
Also when you say reserves, you really mean BEL +RM?
Click to expand...

I used the word 'reserves' because I wanted to explain the generic situation, whatever approach is taken to the underlying balance sheet.

But yes, if the company is subject to Solvency II then those reserves (provisions) could mean the whole TP or it might just mean the BEL - depending on whether the release of the RM is included as part of the VIF or the required capital (RC) element (if doing an EEV or MCEV approach).
 
Lindsay Smitherman said:
I'm not quite sure what you mean by 'moving from MCEV to EV under SII'. The SII bit relates to the supervisory balance sheet, which forms the starting position for an EV calculation. The balance sheet will be determined using whatever regulations apply in a particular jurisdiction, ie Solvency II or whatever. The EV calculation itself can be done using any approach: traditional, EEV or MCEV, irrespective of what the balance sheet is determined under.

In the specific past exam question that you refer to, the company has a Solvency II balance sheet and produces its EV using an MCEV approach.
Click to expand...
I see sorry. I was treating them as seperate things.
 
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