J
Joseph Barnett
Member
Hi,
As I'm doing more questions leading up to the exam I'm noticing that I'm really not that confident with how a life insurer's balance sheet is put together, and I'm blagging my way through a lot of questions where that's important background knowledge.
I'm probably confused about a lot of things but for the sake of asking one straightforward question, I think I'm mostly hung up on the concept of a negative liability vs. a positive asset. It's mostly embedded value questions that are making me sweat but I think it probably applies to any question where I really have to think about what would happen to the balance sheet. To keep things simple I'll just restrict my question to a market consistent embedded value calculation.
I'm always tempted to treat premiums and charges as assets and benefits and expenses as liabilities, but on reflection I think this is all liabilities. I think what's always stopped me from making that jump is that if a contract is purely profitable it will just look like a negative liability, which takes some getting used to.
Now... for embedded value we have the two components - net shareholder assets plus present value of future profits. If a unit-linked policyholder decided to throw in a big premium, what I think would happen is:

I'd appreciate if someone could have a look through my explanation and tell me if I'm getting it or if I'm just talking nonsense.
Thanks,
Joe
As I'm doing more questions leading up to the exam I'm noticing that I'm really not that confident with how a life insurer's balance sheet is put together, and I'm blagging my way through a lot of questions where that's important background knowledge.
I'm probably confused about a lot of things but for the sake of asking one straightforward question, I think I'm mostly hung up on the concept of a negative liability vs. a positive asset. It's mostly embedded value questions that are making me sweat but I think it probably applies to any question where I really have to think about what would happen to the balance sheet. To keep things simple I'll just restrict my question to a market consistent embedded value calculation.
I'm always tempted to treat premiums and charges as assets and benefits and expenses as liabilities, but on reflection I think this is all liabilities. I think what's always stopped me from making that jump is that if a contract is purely profitable it will just look like a negative liability, which takes some getting used to.
Now... for embedded value we have the two components - net shareholder assets plus present value of future profits. If a unit-linked policyholder decided to throw in a big premium, what I think would happen is:
- The company creates a bunch of units for the policyholder, which sit on the liability side
- The company buys a bunch of assets to back the units, which sit on the asset side
- The company expects (hopefully) more from the contract due to a higher fund value (from % charges), and this sits on the liability side as a negative figure
I'd appreciate if someone could have a look through my explanation and tell me if I'm getting it or if I'm just talking nonsense.
Thanks,
Joe