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EV calculation: PVFP

Discussion in 'SP2' started by Rajat gupta, Sep 9, 2018.

  1. Rajat gupta

    Rajat gupta Ton up Member

    Hi All,

    I have a question on EV calculation.
    Considering a without profit term assurance product with some mortality basis. Now if I increase the reserving mortality assumption then how will it increase my Present Value Future Shareholder Profits? I think PVFP is affected by increase in realistic mortality assumption not reserving mortality assumption. Please refer to Sept 2012 Que 2 Part (ii) b.

    Please reply asap.
    Regards,
    Rajat
     
    Rajat gupta, Sep 9, 2018
    #1
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi Rajat

    The PVFP is the present value of future profits, where profit is given by:

    Profit = Premiums - claims - expenses + investment - increase in reserves.

    We need two bases to calculate this: the EV projection basis to calculate the claims, and the reserving basis to calculate the reserves.

    If we strengthen reserves today, then the net assets fall today. But we now can release bigger reserves in the future which means bigger profits and bigger PVFP.

    Best wishes

    Mark
     
    Mark Willder, Sep 10, 2018
    #2
  3. Rajat gupta

    Rajat gupta Ton up Member

    Hi Mark,

    In the equation mention above for PVFP ie:- Profit = Premiums - claims - expenses + investment - increase in reserves, "Increase in reserve" is calculated from EV projection basis or reserving basis (now strengthened one)?

    Will the total impact on EV due to strengthening of Mortality assumption depends upon relation between risk discount rate and Investment return?

    Regards,
    Rajat
     
    Rajat gupta, Sep 10, 2018
    #3
  4. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi Rajat

    The reserves in the "increase in reserve" are calculated using the reserving basis that has now been strengthened.

    Yes the overall impact will depend on the risk discount rate. Strengthening the reserves might increase the reserves by 20 say. So the net assets go down by 20. The reserves will then roll up with investment return and then be discounted back at the risk discount rate as part of the PVFP. If the discount rate is bigger than the investment return then the PVFP will go up by less than 20, and the EV is reduced.

    Best wishes

    Mark
     
    Mark Willder, Sep 10, 2018
    #4
  5. Rajat gupta

    Rajat gupta Ton up Member

    okay got it! Thanks Mark :)
     
    Rajat gupta, Sep 10, 2018
    #5

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