Hi On pg 4 it shows the picture for realistic basis firm. The realistic liabilities are much higher than the mathematical reserves. I know the mathematical reserves are calculated on prudent assumptions and the realistic realistic. Is the increase then mainly attributable to the fact that the future annual bonuses aren't included in the mathematical reserves for realistic firms?
I think the illustration is meant to show peak 2 biting so that WPICC can be shown. For the comparison of peak 1 mathematical reserves and peak 2 realistic liabilities, you will probably need to look at each peak and consider elements which may impact one peak but not the other (or to a less extent).
Yes my question is what are those elements? I only know of the future bonuses - but are there others?
Hi SA Beauty...am just taking a shot here but am thinking: 1. With profits benefits reserves..calculated retrospectively using asset shares or prospectively where bonus rates cannot be calculated using asset share techniques??? 2. Future policy related liabilities e.g cost of guarantees, options, smoothing,planned future enhancements, costs of financing....all these can be done either stochastically, or,market cost of hedging,or, deterministic projections with some appropriate liabilities 3. Realistic current liabilites?? Lets see what the rest say.
Yes, I was also thinking along the lines of WPBR, FPRL, and RCL for Peak 2 (just abbreviations that I use). There are also other elements under Peak 2 realistic liabilities such as cost of not being able to implement MVR freely due to TCF or the apparent "guaranteed benefits" on mortgage endowment due to PRE as well as future tax related liabilities. On the Peak 1 mathematical reserve side, perhaps one could talk about any global reserves (e.g. data reserve, AIDS reserve, resilience reserve, investment reserve, expense reserve, etc...). However, this could depend on how much solvency capital is held (e.g. capital for resilience scenarios may be already taken into account).
WhAt is the difference between the with profits benefit reserve and the realistic current liabilities? Also what are planned future enhancements?
The with-profits benefit reserve together with the future policy related liabilities gives us the reserve for the with-profits policies. The realistic current liabilities are reserves that are not directly related to with-profits policies (don't confuse these with the best estimate liabilities under Solvency II). So they may represent unpaid tax bills for example. Future policy related liabilities may include planned future enhancements. For example, if the with profits benefit reserve is the asset share, but we intend to payout 110% of asset share (perhaps to distribute the estate) then we would have a planned future enhancement of 10% of asset share in the future policy related liabilities. Best wishes Mark
Thanks Mark. Would it be okay to say wpbr is generally long term and is the reserves we hold for promises to policyholders on their with profits policies? Realistic current liabilities generally short to medium term liabilities eg the unpaid taxes you have referred to or deposit back arrangements (is this under reinsurance arrangements)???
