Would really appreciate some help here! I am SO confused by the core reading on quantifying the sources of surplus. I really thought I understood the description in CA1. But I'm doubting my understanding now. In CA1, I understood it to be roughly be as follows: 1. Project the expected experience of the revenue accounts or balance sheet by using, for example, your pricing model or profit test model 2. The projected accounts are then compared with the actual accounts to derive the deviation or variance from what was expected as follows: 3. Isolate surplus due to your first source of interest (for example, sales volumes) by running the pricing model or profit test model a second time, but using the actual volumes sold and not the expected volumes. Comparison of the results of this second run with the results of the first run (in point 1) will give the surplus due to sales volumes. 4. Isolate surplus due to your second source of interest (for example, mortality) by running the pricing model or profit test model a third time, but using the actual mortality or death claims. Comparison of the results of this third run with the results of the second run (in point 3) will give the surplus due to mortality. Anyway, I find the core reading for SA incredibly confusing: Essentially, the main lines in the core reading go like this: 1. Re-run the start year evaluation Model 2. Make any opening adjustments to the balance sheet submitted at the previous valuation date 3. Run the adjusted model with the NEW non-economic assumptions 4. Roll the model forward to the new valuation date using the ACTUAL (!?) investment returns and economic scenarios (I'm assuming this is inflation, exchange rates etc.) 5. ADD new business written in the inter-valuation period into the rolled forward model to show the impact of new business on surplus at the new valuation date 6. Adjust the rolled forward balance sheet for known differences between actual and modelled non-economic experience over the inter-valuation period 7. Adjust the rolled forward balance sheet for capital injections or tax changes 8. Compare the final rolled forward balance sheet to the actual year end balance sheet - any differences that cannot be attributed are unexplained movements It doesn't seem to explicitly say how we derive the sources of surplus all the time. Please correct me if I'm wrong with the following adaptations of the above: 1. Re-run the start year evaluation model. Call this model 1. 2. Make any opening adjustments ... Run the model again using these opening adjustments. Call this model 2. Is it correct to then say: Compare model 2 to model 1 to get the surplus that arises from the opening adjustments. And this is because we want to find out what each source of surplus is, relative to the what we thought would happen right at the very outset and therefore with the very initial assumptions in mind. 3. Run the ADJUSTED... Call this model 3. Is it correct to then say: Compare model 3 with model 2. This gives us the surplus arising from our change in non-economic assumptions relative to the assumptions that we used to have (as implemented in model 2). However, why are we not using "roll forward" terminology here? What's the difference between "run the model" and "roll forward the model"? 4. Roll forward the model to the new... This is where I think I get really confused, assuming I have understood the previous steps. Firstly, why are not simply "running the model" with the actual investment returns and then comparing this to model 3. Is there something specific about "rolling forward" that differentiates what happens in this step from the very first step in this process? Now, in my mind, model 3 has the expected investment returns. So, model 3 is the model that has been rolled forward with expected returns and now we have just rolled forward the model with actual returns. If this is the case, then it seems clear that we're finding the surplus arising from investment returns by comparing the two models. 5. ADD new business written .... into the rolled forward model. Firstly, why are we adding new business to the ROLLED FORWARD model? I mean, aren't supposed to be rolling forward the model by replacing the expected new business volumes with the actual new business volumes? 6. Adjust the rolled forward Similar to point 5, I just don't understand why we adjust the model that has already been rolled forward. Unless what this really means is: Replace those assumptions in the rolled forward model with the actual non-economic experience of the year?
Hi Geraldine Your first four steps above look pretty much right. The only change I would make is to use the solvency valuation model rather than pricing or profit test model. Surplus is the difference between the assets and the reserves, so we need to investigate the impact of experience on the reserving model. This will capture the key ideas of surplus arising from differences between actual and expected experience. However, surplus might come from other sources (eg new business), so Subject SA1 gives a fuller picture than the basics given in earlier subjects. Yes, you're right that the Core Reading hasn't explicitly mentioned the need to take the difference between model 1 and model 2 and so on, but the approach you describe is correct. Finally, you were concerned about making the changes at the start of the year rather than the end of the year, and whether to roll things up. Different companies do the different steps in different orders, so the order given in the notes is not unique. The notes suggests that we change the assumptions at the start of the year - this makes sure that the change only impacts the policies that were actually valued on the old basis. The reserves are designed so that we have exactly enough money at the end of the year if everything happen as expected - so there is no point rolling up on expected assumptions as assets = liabilities at start of year implies assets = liabilities at end of year. By rolling up using actual experience we can see why the assets turned out to be different than expected. I hope this helps. Best wishes Mark
