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Pillar 1 Peak 2

S

SABeauty

Member
Hi

For liability valuation - do we include terminal bonuses in the calculation?
 
I've had issues with this before and raised a thread but didn't get a clear answer.
For the Prospective method the answer is yes - see Ch. 13 P.11 under "Benefits payable". I am confused as to where the TB comes into the Retrospective method - my thoughts are that is doesn't appear in the WPBR in the Retrospective method but instead appears in the FPRL possibly under the "cost of planned future enhancements to benefits not already allowed for in either the Retrospective or Prospective method".
Please can someone clarify this for once and for all - thanks
 
I am confused as to where the TB comes into the Retrospective method - my thoughts are that is doesn't appear in the WPBR in the Retrospective method but instead appears in the FPRL possibly under the "cost of planned future enhancements to benefits not already allowed for in either the Retrospective or Prospective method".
Click to expand...

TB comes into the WPBR (assuming that we are paying out asset share) under the retrospective method.

The asset share implicitly allows for future bonuses as if we hold asset share today as the reserve then it will grow (by definition) to be the asset share at maturity and we set the terminal bonus so that the payout equals this asset share.

It is maybe harder to see how this works near to maturity. Consider an endowment contract. The asset share at the start of the last year is 120. We then add a premium of 10, deduct expenses and claims of 2 and 5 respectively and add investment return of 15. So the asset share at maturity is 120 + 10 - 2 -5 + 15 = 138.

At the start of the last year the policy had sum assured of 70, declared RB of 25, giving total guarantees of 95. The asset share is much bigger than this (the difference mainly relates to the accrued TB, but other elements too). Over the year we delacre a RB of 4 and then finally a TB of 39, giving a final payout exactly equal to the asset share as required.

Best wishes

Mark
 
Thanks

Can you maybe also demonstrate numerically how the cost of guarantees and smoothing would then be affected?
 
Ah yes the retrospective value is the asset share which is independent of their current benefits and which will have scope for TB implicitly included. I see where I was getting confused - thanks for clearing that up.
 
SABeauty said:
Thanks

Can you maybe also demonstrate numerically how the cost of guarantees and smoothing would then be affected?
Click to expand...

So in this case the guaranteed bonus is included in the asset share. So what would the cost of bonus or smoothing be?
 
For info,

September 2007 Q1 gives a nice question on the realistic balance sheet. It shows quite a bit of detail on the different parts applied to a question.
 
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