The question asks how the company's Solvency II and IFRS calculations can be adapted to determine a customer value for term assurance policyholders. So we would need to calculate some form of "embedded value" associated with the customer plus also some "goodwill" element to reflect the fact the customer may purchase products in future. There are a couple of points in the mark scheme that I'm finding confusing:
1.The mark scheme states that we could use the Solvency II valuation to determine the "embedded value" component and there are marks available for stating that "we need to incorporate the release of the SCR and risk margin, hence we would require a methodology to determine that release profile". I'm confused why we would need to do this, as embedded value using Solvency II methodology is just: free surplus + SCR - risk margin (assuming any PVIF due to contract boundaries etc. is negligible). Is the question actually asking us to determine how a customer value will change over time, hence we need to determine the SCR release profile?
2. The mark scheme states the company "may want to split the assumptions using customer segmentation". Is this in relation to calculating the "embedded value" component of the customer value or the "goodwill" component or both? I'm, not sure how this would help us calculate the "embedded value" component but I think this is what's being referred to.
Thanks.
Last edited by a moderator: Sep 18, 2021