"for without profits business ev is the release of any margins within the solvency reserves to the assumptions used in the ev calculation.It is important that reserves used in the determination of net assets are consistent with those used in the determination of future profits.. Dont know what is this trying to convey Isnt present value of future shareholder profits for without profits business =PV(prems+inv income-claims and expenses plus release of solvency reserves)
I can see how it appears to be conflicting but the idea is that if our EV projection basis was the same as our valuation basis then the exact amount of the reserve would be required to meet the claims and expenses in each period and no profit would emerge. It's the fact that the EV projection basis and the reserving basis differ that leads to profit emerging. EV uses a realistic basis. The reserving basis is prudent and so we will release reserves each period once the experience is better than provided for. To refer to the formula for PVFP you've included.. If the experience turned out to be the valuation basis for a period: Claims and expenses will be higher and investment income will likely be lower than the realistic projection. Premiums may be higher if the supervisory basis doesn't permit discontinuance rates. These effects will be offset by the release of the reserve held for this period and profit will be zero in total. Not sure if you've got any problem with the second sentence.. I think the first one appears to have caused the confusion but the part about having reserves consistent: SH NAV is another component of EV and is in part determined by the capital locked into the company for reserves. Part of this capital is required to meet claims and expenses, the other part is the prudence that is released in the PVFP. If you use a completely different basis to determine the reserves for SH NAV you will be artificially altering the EV. For example if you were to use a very prudent basis for the PVFP part this would increase the PVFP as more of this prudence is projected to be released over the life of the business. If you then used a realistic (and thus smaller) reserve to calculate the Net assets you would see a higher NAV than if you used the very prudent basis. This is effectively double counting as if these assets are considered locked in for release through PVFP, they can't also be considered to be free as part of the SH NAV. Hope this helps..
