Ch 16: Practice Question 1

[kntg24]

In part (iv),
all 5 items surplus are calculated by using actual result - expected result except for change in valuation basis. This gives a negative surplus(-543,863). These 5 items add up and get -268,049 which matches with the total surplus arising from part (iii). Why change in valuation basis is not using actual result - expected result as other items?

 

[Lindsay Smitherman]

You might need to step back and think about what we are overall trying to achieve through doing an analysis of surplus. We are effectively taking the overall amount of surplus arising (= change in surplus = change in {assets - liabilities}) and working out where it has come from.

The first item in this particular analysis is the return on the start of year surplus, which is exactly that. The surplus at the year end will be bigger than the surplus at the start of the year due to investment return earned on it. This isn't the difference between actual and expected, it's just the return earned.

The next three items (expenses, mortality, investment return) are all experience variances. Surplus has been increased/reduced by actual experience being better/worse than expected. So these three items are calculated by comparing actual experience with what was expected.

The final item is the change in valuation basis. If the assumptions on which the year end liabilities are calculated are changed, this changes the amount of surplus, since surplus = assets - liabilities. So this item is calculated as {liabilities after basis change - liabilities before basis change}.

Hope that helps.