Good day
I understand that there are mainly 2 reserve calculation methods: The formula method and cashflow method.
Q1 - Am I right to assume that within each of these methods, we can apply either market consistent or prudent approaches?
So for example, if i chose the formula method and applied market consistent approach then I would be discounting using the risk free and my other assumptions will include a margin.
However, if I picked the prudent approach, then I would have to discount at a rate that reflects the held assets and include margins.
Q2 - Also, say I chose the prudent approach with the formula and cashflow method. I recall that reserves MUST be discounted at the investment return rate. For example, say that my backing assets will provide a return of 8%. Then in the cashflow method - I must use exactly this 8% (cannot include margins - But margins will be included in the other assumptions). While with the formula method, I can discount using say 6% and I have included a prudent margin.
Please illustrate using an example if my understanding is incorrect.
Thanks in advance.
I understand that there are mainly 2 reserve calculation methods: The formula method and cashflow method.
Q1 - Am I right to assume that within each of these methods, we can apply either market consistent or prudent approaches?
So for example, if i chose the formula method and applied market consistent approach then I would be discounting using the risk free and my other assumptions will include a margin.
However, if I picked the prudent approach, then I would have to discount at a rate that reflects the held assets and include margins.
Q2 - Also, say I chose the prudent approach with the formula and cashflow method. I recall that reserves MUST be discounted at the investment return rate. For example, say that my backing assets will provide a return of 8%. Then in the cashflow method - I must use exactly this 8% (cannot include margins - But margins will be included in the other assumptions). While with the formula method, I can discount using say 6% and I have included a prudent margin.
Please illustrate using an example if my understanding is incorrect.
Thanks in advance.