I wasn't talking about a 'non-UL BEL', but about the non-unit component of a BEL for a UL contract. Recall that the non-unit component of a reserve for UL business is calculated as the PV of future {expenses + benefits in excess of unit fund - charges). Charges would probably be loaded up to make profit in addition to being sufficient to pay for expenses and excess benefits, hence this calculation would (on a best estimate basis) be expected to be negative. I'm not sure why you believe that a positive BEL is 'unfavourable'. The overall BEL for a UL policy would be the unit reserve (= unit fund value) plus the non-unit reserve component (as described above) and this would very likely be positive in total, particularly once the unit fund has grown with premiums and investment returns over time. That's not 'unfavourable' for the company, as they will be holding the unit fund that backs the unit-related component of the BEL (as this is what claims paid out are likely to be based on).
Yes there will be offsetting in relation to the assets that back the BEL too, but bear in mind that would be holding more assets than that overall (since would have assets > BEL), therefore the overall impact will depend on what happens to the value of the assets. [Also we are told in this question that the fixed-interest assets held to back the BEL have a longer duration than the liabilities, so again it will be the assets that are contributing more to the SCR under a stress impact.]
April 2021, Q2 iii) Higher expeses - why is this not an experience variance in the BEL analysis of change? Also, for parts ii and iii, why is mentioned that the experience over the year could change the assumptions, but the question simply asks the impact of the scenario on the analysis of change.
The question is only asking about the analysis of change in the BEL, not an overall analysis of surplus, so we are only interested in things that change the BEL. If actual expenses incurred during the year are higher than were expected, this only impacts the amount of assets held (would have lower assets than expected, due to spending more of them on the higher expenses) - there is no direct impact on the BEL. However, if the company expects future expenses to be higher too (ie believing that the expense over-run is likely to continue into the future) then it would increase its best estimate expense assumptions in the BEL calculation, increasing the BEL (and hence contributing to the analysis of change in BEL).
okay, but why in the death higher than assumed, experience variance is mentioned in the answer? I understand with more deaths there would be lower policies in force which impacts the BEL but the fact that there is no mention of experience variance for higher expense is confusing.
I think you have answered your own question? More deaths -> lower BEL = a change in BEL So this IS an 'experience variance' which contributes to the change in BEL, so is a component of the analysis As per my earlier post, spending more money than expected on expenses -> lower assets and no change in BEL (assuming that future assumptions aren't changed) So this is NOT a contributor to the change in BEL, therefore not a component of the analysis
Okay, thanks.. so are we saying that a pure experience variance if it doesn’t have any impact on the future projections is not part of analysis of change in BEL? Example, higher expenses or inflation than expected in the current year.
Yes, but am not convinced that inflation is a good example, because higher than expected inflation during the year will mean that any inflation-linked benefits will be higher than expected, and these will have an impact on the future projections and so would change the BEL for such products. [Also the entire expense base is likely to be higher, and so future expense assumptions would also likely be increased - again impacting the BEL.]
Got it thanks. so basically the BEL impact from such variances contribute to BEL analysis of change. Whereas the p&l during the year from such variances would be a component of analysis of surplus since it involves the asset side.
In general, isn't it that a negative BEL is considered favourable or rather an asset compared to positive BEL which is a true liability. So in that sense, wouldn't a positive BEL be unfavourable?
My point was that a positive BEL would be normal for UL business. The unit reserve component of the BEL will always be positive, but that doesn't matter because the company will be holding the assets that match it (the policyholder's unit fund). So that isn't 'unfavourable' for the company to have to hold the (positive) unit reserve, it is a completely neutral position. The non-unit reserve component of the BEL might well be negative, but the BEL overall could well still be positive (once beyond the early durations, if regular premium). A negative non-unit reserve would be 'favourable' to the insurer, as it reflects the capitalisation of future profits (from the excess of future charges over expenses etc). So the insurer could still be in a 'favourable' position in relation to the UL business (ie having a negative non-unit component) but with a positive BEL overall (unit + non-unit).
