Hi Lynn Can you please provide help answering the below questions, as i am really struggling on EEV chapterc 1.What does 'basis of external review' means? 2.Also, on points related the possibility of PVIF under SII, a. Why would there be any difference between best estimate investment return and ViR used in calculating the BEL if MCEV is used, as investment return remains the risk free(plus LQP, if deemed appropriate) ? Are we assuming that company using non-market CEV where investment return are based on assets in which company has invested ? b. The fourth bullet point says, release of risk margin, after allowing for cost of holding 'it'. My understanding was that we deduct cost of holding SCR, which broadly as same as risk margin under SII. Can you please elaborate this point in right Context? 3.If any company using non-market consistent EV under SII, then cost of capital shouldn't be the 'difference between investment return and shareholder required return(RDR) ' as given under principle 5. 'Frictional cost' should be used if market consistent EEV is used because there will be no difference between investment return and Rdr, so that cost would be tax and agency? Also do you agree of my reasoning about using frictional Cost under MCEV? Thanks
That just means making clear what exactly the review is covering. The discount rates used in the BEL will be based on risk-free rates, possibly including the addition of a matching or volatility adjustment (MA and VA). These are all effectively set by EIOPA. The best estimate investment return assumed in the EV projection basis will be the company's own estimates of risk-free rates + illiquidity premium. The latter, in particular, may differ from what EIOPA has set. Also, perhaps the company has not applied for (or been given permission for) an MA or VA, but believes that it should be able to take credit for an illiquidity premium. This would also lead to a difference. See separate thread: https://www.acted.co.uk/forums/index.php?threads/sii-eev-and-mcev.11868/ This sounds correct, if you change 'shouldn't' to 'should' in the first sentence.
Hi Lindsay In SII, do we deduct time value of option and guarantee along with intrinsic value.If not then shouldnt it a cause of PVIF under MCEV under SII?
I am wondering if you are confusing the two very distinct concepts of calculating policyholder provisions and calculating shareholder value? Apologies but I don't understand what you are getting at with your question 'In SII, do we deduct time value of option and guarantee along with intrinsic value.' It doesn't make sense to deduct the time value of options and guarantees (TVOG) from technical provisions. The TVOG is part of the BEL. If there are options and guarantees in the products that are being valued, the BEL (being market-consistent) must be sufficient to cover both the intrinsic value and the time value of these options/guarantees. Turning to your question about whether the TVOG is 'a cause of PVIF': the PVIF represents the value of future profits arising for shareholders. The TVOG represents the market-consistent best estimate of the amount that the company expects to have to pay out to policyholders due to these options and guarantees biting. It is not shareholder profit. [Please be aware, as per the notice on the forum, that the tutors are very busy at the moment and so will not be able to keep answering these questions. Hopefully other students and forum visitors will be able to help out with further queries.]
