General Questions

[unisl27]

1. Is there some overlap between Goodwill and PVFP? If they both refer to future profits then is there not some double counting when it comes to calculating an appraisal value? Or is there a big difference between future shareholder profits and future profits in general?

2. Why is monitoring lapse experience important for marketing?

3. What is the difference between lapses and withdrawals? There are a lot more subdivisions for w/d data- why are there much less for lapse experience?

4. Can you give me an example of Financial Reinsurance (for short-term contracts)?

 

[bystander]

I'll give you my best stab....

Appraisal value = PVFP + goodwill. Goodwill is actually an intangible that cannot be assessed by traditional cashflow methods directly. I think what perhaps happens is you start with what is already on the books. Then you can value potential new business you may acquire later. As there is uncertainty there, different assumptions can be applied.

On lapses and withdrawals, I know that they do get used in an interchangeable/loose sense. To me withdrawal means that a cash value is available ie say a surrender value on a life contract. In life contracts, a policy can lapse with a value or without. Consider say a unit linked life policy. With no future premiums charges are still deducted from the pot and so it can be reduced to zero and therefore lapse but the customer has not consciously withdrawn.

With pension a customer may actively cease membership but a value will not be returned to him.

Is there a glossary with the course where you can look up the definition per the syllabus?

Otherwise, I think you have to look at the whole scenario rather than the word.

 

[bystander]

Re your lapses and marketing qn....

Losing business can mean loss making business particular when it occurs at early durations in the contract. This is because the initial expenses haven't been recovered but also because the contribution to fixed expenses is affected. So you want to target areas where business is expected to 'stick'. If you know say a particular geographical area has high lapses, don't direct mail in the area etc.

Sorry can't help on financial re.

 

[Charlie]

Financial reinsurance for short-term contracts (ie for general insurance business)...

As I understand it:

General insurers are required to hold the discounted value of their liabilities as reserves. This could be significantly higher than the discounted value - especially where the business is expected to be long tailed.

With this kind of financial reinsurance, the insurer pays the reinsurer an initial amount up front, eg a payment of 10.

The reinsurer then promises to pay the insurer a series of payments, eg 1 for the next 12 years.

If these repayments can be classed as reinsurance recoveries, then - like the reserves - they need not be discounted. In this example, the insurer's assets will reduce by 10 (in respect of the initial payment to the reinsurer), and the liabilities will reduce by 12 (since the repayments need not be discounted). Hence the insurer's solvency position will improve by 2.

This type of arrangement is more like a simple investment (eg buying a bond or annuity). In many countries, it is not allowed as a method of improving the reported capital position.

 

[Madiba]

Financial Reinsurance

Charlie, i think you mearnt to say general insurers are required to hold the undiscounted value of liabilities, is this correct?

 

[Charlie]

Yes - sorry - undiscounted value!