Capital Management (ch15)

[Viki2010]

Hi

For a mutual, as the retained profits belong to the with-profits policyholders, they could be described as an "under-distribution of surplus", so they are included.

Best wishes
Lynn

And what happens if the mutual is selling only non-profit business? Wouldn't we need to have an item called "profits" ?

 

[Lynn Birchall]

The chapter discusses the idea of market consistent valuation that the liabilities are valued as equal to the equivalent assets e.g. liability with a guarantee after 10 years will be valued in line with e.g. a bond value with 10 year maturity.

How does the above relate to the practical approach to valuing liabilities using projection models with market consistent assumptions? We are valuing liabilities by projecting them into the future based on MC assumptions.

In an ideal situation, we'd obtain a market consistent value of our liabilities by taking their value as the value of equivalent, perfectly-hedging, assets.

However, in reality, we can't find assets that perfectly hedge our liabilities, and so at this point we start to project and discount cashflows using market-consistent assumptions.

Hope this helps
Lynn

 

[Lynn Birchall]

And what happens if the mutual is selling only non-profit business? Wouldn't we need to have an item called "profits" ?

Hi again

I think it's safe to assume a mutual must have some with-profits policyholders (who are entitled to the profits).

It's a question that's arising in the UK at the moment, as falling sales of with-profits are meaning that the numbers of with-profit policyholders are declining. This raises question about the continued existence of mutuals. Some are/might put themselves up for sale & others might come up with innovative new ways of somehow sharing profits with policyholders.

Lynn

 

[Viki2010]

Thanks Lynn. Your answers make perfect sense.

Just a quick question. If a mutual has 99% Non profit business and can't share profits with non-existent shareholders nor does it share it with the policyholders, does it mean that all the surplus accumulates in larger quantities than in proprietary companies? Does it mean that such mutual would be a much more stable company by having more capital - i.e. if you want to buy a policy it would be better to choose a mutual that doesn't sell/hold a lot of WP business?

 

[Lynn Birchall]

Hi again

I'm just not sure that situation would ever really arise - I think a mutual would always be sharing profits with policyholders.

The changing balance between non-profit and with-profit business causes an issue, but then at some point as I say a mutual can take steps to avoid being in the position of having no-one to own the profits (and take the associated risks).

Best wishes
Lynn

 

[Mbotha]

Whereas under the internal economic capital measure the company would hold: Market consistent value of liabilities + Required economic capital.

The market consistent value of liabilities doesn't have to equal BEL + Risk Margin, and for economic capital purposes the company doesn't have to follow the approaches prescribed by the regulator. The company will use its own approach, and so "may not include the risk margin". Similarly, it may not feel that other regulatory restrictions, such as the contract boundaries applied to the BEL, are appropriate and so would ignore these rules when it does its own internal calculation.

Hi Lindsay

I wanted to come back to this quickly...

Economic capital is the value of assets in excess of liabilities (ie. doesn't include liabilities in the calculation). Required capital also looks at assets less BEL in the stressed vs unstressed scenarios (RM not included for practical reasons). So in this context, I'm now confused again about the risk margin comment in the notes: that the internal model may not include the risk margin. The SCR doesn't include the risk margin either.

Please can you help me with this again?

Thanks so much

 

[Lindsay Smitherman]

Economic capital is the value of assets in excess of liabilities (ie. doesn't include liabilities in the calculation).

As the Core Reading indicates, we have to be a bit careful when using the word "capital": your definition represents available economic capital.

Under the economic capital assessment, the company has to hold sufficient assets to cover the total of its internal assessments of liabilities and required capital. This total may differ from the regulatory total (=TP+SCR) for various reasons, including those set out in that particular paragraph of the Core Reading:
- internal total may exclude the risk margin (or, at least, calculate it very differently)
- internal assessment may allow for cashflows beyond the contract boundary
- internal required capital assessment may be on different confidence level

Does that help?