Hi, I have a confusion regarding my interpretation for Ques 1 of April 2023. "QUES: The company has carried out an analysis of its supervisory valuation surplus. Statutory liabilities are assessed on a best estimate basis and required capital is assessed on a risk-based approach that is the same as Solvency II. Initial output from this analysis identified a significant positive non-economic variance. (i) Discuss possible reasons for this result." My Interpretation: Ques is asking about the Analysis of Surplus and has mentioned Positive Non-economic Variance. By Variance it means: Actual less the Expected. Non-Economic Variance means: Mortality, Lapses, Expenses and mix of business(optional). Positive means: Actuals are higher than expected Based on this interpretation, I will draft the answer focusing on higher mortality, higher lapses and higher expenses. However, in the exam report, they have mentioned about lower lapses and lower expenses. Can anyone please help me understand what the correct approach is to interpret the answer here. Thanks in Advance.
A 'positive variance' within an analysis of surplus is one that generates a positive contribution to the surplus arising (or 'profit') over the period. Because expenses are a deduction from profit (or surplus arising), a 'positive variance' relating to expenses must mean lower than expected expenses. For mortality, higher than expected mortality would generate a positive variance for annuity business, but lower than expected mortality would generate a positive variance for term assurances (say) - since claims are also a deduction from profit. For lapses, it is slightly less clear whether higher or lower than expected lapses would give a positive variance (although probably lower) - so alternative outcomes are covered in the solution to the question you mention.
Thank you for the clarification. It helped me understand the approach that IFOA has opted in exam. However, I still want to understand how we should approach a question. Should it be broken on word-by-word basis or overall meaning. Here, if we split on word-by-word basis the interpretation is different. In course material also, it is mentioned that the Variance is the difference between Actuals and expected. Basis that, Positive Variance can be concluded as higher actuals than expected. If we mention our interpretation in the exam clearly and comment based on that, will we be marked accordingly?
We aren't involved with the examining so can't say whether or not that would have gained any credit. If something is ambiguous then generally marks would be given for different interpretations. However, I am not convinced that the examiners would have considered this to be ambiguous. The phrase 'significant positive non-economic variance' means that non-economic experience has made a positive contribution to surplus arising, ie the company is now in a better position. [You need to look at the overall meaning of a phrase.] Also bear in mind that this 'non-economic variance' will be a single item in the analysis of surplus, comprising the collective impact on the surplus arising (or 'profit') of all non-economic items of experience differing from what was expected. In other words, for this to be a positive variance, we must have: {premiums - expenses - claims + investment earnings - increase in liabilities} based on actual non-economic experience > {premiums - expenses - claims + investment earnings - increase in liabilities} based on expected non-economic experience It doesn't make sense to break this down into saying that therefore we must have actual expenses > expected expenses, because in fact the formula shows that the above inequality is more likely to hold if actual expenses < expected expenses.
