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EV components

B

Benjamin

Member
Hi,

Ref: Q&A bank, Part 4, solution to question 4.4(ii)

With respect to EV, are the terms PVIF and PVFP not interchangeable?

The notes (CMP, Ch19, p.5) say that they are interchangeable but this question asks for a method to calculate PVFP and the solution awards 2 out of 7 marks for valuation of net assets.


Also, does time-value of options and guarantees not have to be deducted? The solution does not mention this but the core reading does (CMP Ch19, p.11, "Principle 6") and there may e.g. be guaranteed fund values on the UL policies.
 
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Benjamin said:
Hi,

Ref: Q&A bank, Part 4, solution to question 4.4(ii)

With respect to EV, are the terms PVIF and PVFP not interchangeable?

The notes (CMP, Ch19, p.5) say that they are interchangeable but this question asks for a method to calculate PVFP and the solution awards 2 out of 7 marks for valuation of net assets.


Also, does time-value of options and guarantees not have to be deducted? The solution does not mention this but the core reading does (CMP Ch19, p.11, "Principle 6") and there may e.g. be guaranteed fund values on the UL policies.
Click to expand...
They are interchangable - core reading section on analysis of embedded value
 
Benjamin said:
Hi,

The notes (CMP, Ch19, p.5) say that they are interchangeable but this question asks for a method to calculate PVFP and the solution awards 2 out of 7 marks for valuation of net assets.
Click to expand...

It is helpful to consider the net assets, particularly how they are defined, in order to describe the PVFP calculation. In particular, whether the release of the RM and/or SCR are included within the "net assets" component or within the PVFP. [Note that the total number of marks available is some way more than 7, and so full marks can still be obtained without referring to net assets.]

Benjamin said:
Also, does time-value of options and guarantees not have to be deducted? The solution does not mention this but the core reading does (CMP Ch19, p.11, "Principle 6") and there may e.g. be guaranteed fund values on the UL policies.
Click to expand...

Yes, if there were any guarantees included within the policies (eg a guaranteed minimum maturity value on the unit-linked business) then the non-unit cashflows being valued would need to include the cost of this guarantee in excess of the unit fund, and a stochastic or option pricing technique would be required in order to capture the time value. This is not mentioned explicitly in the solution because there are relatively few marks available for this question (compared with how much there is to cover in the answer) and the scenario does not mention there being any guarantees offered.
 
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