Peak 2 RL

On Peak 2 we can use Retrospective or Prospective method to value the WPBR. Does it make any overall difference which one we use or should the total RL be roughly the same. I say this as the Retrospective won't include the future bonuses but the Prospective will but I presume if we use the Retrospective method the bonuses just appear under FPRL instead so the total RL will be the same even if the amounts under WPBR, FPRL and RCL are different.
thanks

 

WPBR based on the retrospective method uses asset share which takes into account the actual experience up to the valuation date. Prospective method uses best estimate assumptions of the future experience. That is the fundamental difference.

Hence for an exam type question you could probably discuss each element of retrospective asset share and prospective best-estimate reserves which could impact the realistic liabilities as a starting point to gain some marks.

 

Thanks - I understand the difference but am just wondering where do the future bonuses appear if we are using the Retrospective method? Do they appear in the FPRL instead? Would we expect the total RL to be the same regardless of which method we use? (ie will the differences in the components of the RL balance)

 

Well, if we build up asset shares using actual experience up to the valuation date and if we compare this figure against the future experience then the two will only equal by chance (probably with a very low probability). The extreme case is that if we build up asset shares up to the maturity date of the policy, the earned asset share may not necessarily equal the maturity value depending on the actual vs. expected experience. That is why TB may be applied to aim to pay out +-100% of asset share at maturity.

There are two thoughts that cross my mind which should help with the understanding:

1. Calculating surrender value: Remember that a retrospective calculation of SV will not necessarily run into maturity value. I think the idea is similar as SV will be based on the earned asset share.

2. Equating retrospective and prospective reserves: Remember that these will only equal if the assumptions for calculating the two sets of reserves are the same. This is from CT5. In contrast to this, we have asset shares which are actual experience and prospective reserves need to be calculated using expected future experience. The two may not be equal. Also, when we talk about reserves, we are actually talking about actuarial liabilities/realistic liabilities (if assumptions are best-estimate).


With respect to future bonuses, I think asset shares only take into account the actual bonuses already declared/guaranteed and these may feed through to the "cost of guarantees" outgo or as part of claims (benefit + bonuses paid/payable).

Please do correct me if I have some things said incorrectly. Hope this helps.

 

Ok so by future bonuses we mean future bonuses that have already been "earned" (are part of the asset share already) but not yet distributed (not part of the benefits yet) rather than meaning bonuses yet to be "earned" (projected future gains in the asset share)?

 

Just to make sure I am understanding the above (and the core reading) correctly, is it right to say that when using a prospective method to calculate the WPBR, the FPRL are equal to the sum of the following:

• Cost of future planned enhancements (i.e. running down the estate)
• Some financing costs (subordinated ranking below liabilities)
• Mis-selling costs
• Tax on FPRL assets

The remaining items (COG, COS, Cost of Options, Non-contractual TCF requirements, non-subordinated financing costs, shareholder transfers) would only be applicable for the retrospective method as they are all contained within the WPBR for the prospective method?