Ch17-EV

[Actuary@22]

Hi

I have a few doubts in Ch 18 EV as per Acted 2019 no0tes:

1.On pg8,didn't understand the concept of subtracting PV of future releases of required capital from here
Cost of required capital = Amount of required capital –
PV (future releases of the required capital, allowing for
investment return)

2. On pg11,What does fund exactly mean here?
use bonus rates that are calculated to extinguish the fund – this approach places an
implicit value on any free estate.

3. On pg 20,didn't understand if both discount rate and expected investment return are risk free so how does the following statement hold true?
In these circumstances, a risk-neutral market-consistent EV would be expected simply to increase
by the risk-free return each year. This is because the expected investment return and discount
rate should both equal the risk-free rate.

 

[Lindsay Smitherman]

1.On pg8,didn't understand the concept of subtracting PV of future releases of required capital from here
Cost of required capital = Amount of required capital –
PV (future releases of the required capital, allowing for
investment return)

We project forwards the pattern of release of the required capital for the in-force portfolio, allowing the capital to earn investment return at the expected rate up to its point of release. Discount the projected releases at the chosen discount rate. Take the difference, which will basically reflect the excess of the discount rate over the expected investment return.

Equivalently, this assesses the opportunity cost of having this capital locked in.

 

[Lindsay Smitherman]

2. On pg11,What does fund exactly mean here?
use bonus rates that are calculated to extinguish the fund – this approach places an
implicit value on any free estate.

The WP fund (ie bonus rates that would use up all the assets in that fund, including the estate)

 

[Lindsay Smitherman]

3. On pg 20,didn't understand if both discount rate and expected investment return are risk free so how does the following statement hold true?
In these circumstances, a risk-neutral market-consistent EV would be expected simply to increase
by the risk-free return each year. This is because the expected investment return and discount
rate should both equal the risk-free rate.

To put this into context, it immediately follows the explanation of why the overall EV would (under certain caveats that simplify the position) increase by just the unwind of the discount rate on the PVIF + the expected investment return on free surplus.

If these are both risk-free rates (as would be the case under a market-consistent assessment), the EV simply increases by the risk-free rate (in this heavily simplified scenario).