Hi all, I was reading the answer to the question "how embedded value moves when the actual experience is worse than the EV projection basis" I understand that both free assets and PVFP reduces as a result but I am unable to understand how to compare the extent of this reduction. The core reading says, Both of these will lead to a reduction in embedded value. The effect on free assets will normally be much greater than the effect on PVFP. However, there might be instances where the opposite is true (eg if the bad experience in question is a high medium- to late-term lapse rate for term assurance policies). Thanks and Regards
Hi Riya When we have bad experience that will impact just the most recent year in the PVFP, but it will impact all the future years if we change the assumption in our reserves. So the reserving impact is often the biggest. However, if the impact is late in the policy term then it will have less of an impact on reserves than if it occurred early in the term. Best wishes Mark
