EV - contract renewals

[Benjamin]

Hi,

Ref 1: CMP, Ch 19, p.12, "Principle 8"
Ref 2: Q&A Bank, Part 4, Solution to question 4.4(iii)

Could you please comment on the status of a recurring single premium in the context of inclusion in EV?

The core reading says "The value of new business includes the value of expected renewals on those new contracts and expected future contractual alterations to those new contracts. The EV should only reflect in-force business, which excludes future new business" though the answer per Ref 2 suggests that it would require justification to exclude future recurrent single premium.

 

[Lindsay Smitherman]

Recurrent single premiums can be treated as renewal premiums (not new business) for EEV/MCEV purposes if they are "pre-defined and reasonably predictable". [Note that this is detail taken from the Principles documents issued by the CFO, not from the Core Reading.]

Bear in mind that EV calculations are less constrained than regulatory reporting, so the company can use judgement in determining how it will treat certain aspects. It may, however, decide to take the same approach to the valuation of recurrent single premiums in EV as used for determining whether there is a contract boundary for the purposes of Solvency II.

Note also that question 4.4 is about determining an embedded value for an acquisition scenario. The approach and basis for such a purpose is not prescribed in any way, and is entirely at the choice of the entity (in this case, the purchaser) performing the calculation.