The answer script mention that analysis of the surplus may require additional sensitivity runs and these will be difficult to accommodate within the tightly controlled ELL approach. can anyone please explain to me what does this line mean. Any numerical example of AOS will be highly appreciated.
Analysis of surplus is described in Chapter 37. It basically involves breaking down the surplus (or profit/loss) arising over a period into its constituent sources. A significant component of surplus arising normally relates to actual experience differing from expected experience, where the latter means the assumptions made at the start of the period. So, for example, if expenses were expected to be £25 per policy over the period but were actually £20 per policy over the period, a profit (relating to the £5 saved per policy) will have arisen. Other profits / losses could arise in relation to differences in mortality rates, morbidity rates, GI claim rates or amounts, investment returns, inflation, persistency rates - and so on. The analysis of surplus breaks down what the contribution to the surplus arising is from each of these sources separately. In order to do this, simplistically speaking, the valuation model needs to be run for each of the above assumptions on the 'expected' basis and then also on the 'actual' basis, and the difference taken for each. In practice the process is more complicated, but hopefully you take the point that a lot of runs are needed on different parameter inputs. For this particular question, this may be more difficult due to the way in which the valuation and model teams are set up, as described in the detailed question scenario. Hope that helps. [BTW I have renamed this thread to make the content clearer for other students using the forum.]
