Hi, can you please explain the difference between surplus arising and embedded value profit during the year? Question 2 from April 2008 asks for the embedded value profit, and while I understand the calculation of EV profit, I am unclear on how this is different to surplus arising.
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Embedded value
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varsha.agarwal2001@gmail.
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Hi, as per my understanding,
"Surplus arising" is based on entire portfolio to capture the high-level impact of economic and non-economic variances and assumption impact- where surplus is excess of change in assets minus change in liabilities over a given period. This surplus gives overall confidence in valuation process if all components are making sense while doing roll-forwards. This surplus is at entity level- helps to quantify difference between actual and expected scenario and needs to be distributed to both policyholders and shareholders at some point of time in future. (in case of WP).
Whereas Embedded value is the separate metric to quantify shareholder's profitability and potential profits held in existing business for future years via margins. Hence EV profit arising during the year is based on separate projections for shareholder's cashflows and profits analyzed at risk discount rate to enable shareholders place value on existing business and distribute dividends.
"Surplus arising" is based on entire portfolio to capture the high-level impact of economic and non-economic variances and assumption impact- where surplus is excess of change in assets minus change in liabilities over a given period. This surplus gives overall confidence in valuation process if all components are making sense while doing roll-forwards. This surplus is at entity level- helps to quantify difference between actual and expected scenario and needs to be distributed to both policyholders and shareholders at some point of time in future. (in case of WP).
Whereas Embedded value is the separate metric to quantify shareholder's profitability and potential profits held in existing business for future years via margins. Hence EV profit arising during the year is based on separate projections for shareholder's cashflows and profits analyzed at risk discount rate to enable shareholders place value on existing business and distribute dividends.
Thank you, that's helpful! So if the definition of assets and liabilities was the same in the two cases (e.g., supervisory), and if the embedded value projection also has the same assumptions - would this mean that Embedded Value and Surplus arising during the year are the same if this is only without-profits business?
The presentation will be different as the change in the Embedded value will equal a change in net assets plus a change in PVIF, whereas an analysis of surplus will be a change in net assets only.