• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

embedded value : confusing

U

uktous

Member
Hi,

I have read the setting assumption chapters.
However, I am confusing.

Embedded value is a more realistic assessment of the value of an issuer.
However, calculating Embedded value will use supervisiory reserve.
Using supervisiory reserve means prudential, hence not realistic.

Anyone can explain that?

thanks
 
Hi,

I have read the setting assumption chapters.
However, I am confusing.

Embedded value is a more realistic assessment of the value of an issuer.
However, calculating Embedded value will use supervisiory reserve.
Using supervisiory reserve means prudential, hence not realistic.

Anyone can explain that?

thanks

I think your logic is a little flawed. Supervisory reserves have to be held. Because they are prudent, each year on the realistic projection basis, experience will be better than expected, and this value will be released as profit.

For example, if you expect to pay 5000 in claims on a prudent basis, and you end up paying 4000 on realistic basis, 1000 will contribute towards the EV.
 
Ev

So, to take CannonRee's example further:

Let's suppose the only business we have is a cohort of one-year term assurances, where the benefit is payable at the end of year of death.

Suppose our current prudent reserves are 5000, but realistically we expect to have to pay out 4200 in one year's time, which has a current value of 4000 (discounting at 5% pa).

Suppose out total assets are 5500, being 5000 in reserves and 500 free surplus assets.

Our EV = PVIF + FS (present value of in-force business + free surplus)

PVIF = (5000 x 1.05 - 4200) / 1.05 = 1000

ie the present value of "projected assets - projected claims"

So EV = 1000 + 500 = 1500

We've used realistic assumptions to project the assets and estimate future claim amounts, but we've also used prudent assumptions to work out our current reserves. If we had longer term business, we'd be working out our prudent reserves for each future year, to see what release of reserves is expected and the sum the present value of all these releases to get our PVIF component.
 
Back
Top