Nicholas_B
Member
Hi there
I am referencing from Page 16-17 of Chapter 15 (Models (2)) from the 2021 Core Readings, on the question on why PVFP for existing business would be expected to be positive.
1) How are we able to 'see' the retrospective and prospective views in action here? For instance, the solution mentions on the role of supervisory solvency requirements in the prospective view, but makes no reference to it in the retrospective view. My lack of clarity comes from the my usual understanding on retro and prosp concepts of surrender values, which is a little difficult to be applied here.
2) In the prospective reasoning, it is also mentioned that:
'Alternatively, if reserves are calculated on a best estimate basis, the expected future experience in the EV basis should equal the reserving assumptions, so that positive profits emerge as the solvency capital is released'
However, earlier in the readings outlining the calculation of EV (Section 2.1), it mentions that profit emerging each year is expected to be zero if the supervisory reserve assumption were exactly the same as the assumptions used to calculate the cash flows in the EV calculation. So I was wondering how do I reconcile these 2 pieces of information together?
3) I see there are different forms of 'basis' being mentioned in the solution, namely:
-Embedded Value basis
-Best estimate basis
-Prudent reserving basis
a) Am I right to say that the embedded value basis is the basis we see in the calculation of the components found in the 'PV of future SH profits' part of the EV formula? (With the exception of the release of supervisory reserves component, as I believe this should be calculated under prudent reserving basis using more conservative assumptions)
b) Is there any difference between the embedded value basis and Best estimate basis in terms of the level of conservativeness used in the assumption setting?
Appreciate your help in the above clarifications, thank you.
Nicholas
I am referencing from Page 16-17 of Chapter 15 (Models (2)) from the 2021 Core Readings, on the question on why PVFP for existing business would be expected to be positive.
1) How are we able to 'see' the retrospective and prospective views in action here? For instance, the solution mentions on the role of supervisory solvency requirements in the prospective view, but makes no reference to it in the retrospective view. My lack of clarity comes from the my usual understanding on retro and prosp concepts of surrender values, which is a little difficult to be applied here.
2) In the prospective reasoning, it is also mentioned that:
'Alternatively, if reserves are calculated on a best estimate basis, the expected future experience in the EV basis should equal the reserving assumptions, so that positive profits emerge as the solvency capital is released'
However, earlier in the readings outlining the calculation of EV (Section 2.1), it mentions that profit emerging each year is expected to be zero if the supervisory reserve assumption were exactly the same as the assumptions used to calculate the cash flows in the EV calculation. So I was wondering how do I reconcile these 2 pieces of information together?
3) I see there are different forms of 'basis' being mentioned in the solution, namely:
-Embedded Value basis
-Best estimate basis
-Prudent reserving basis
a) Am I right to say that the embedded value basis is the basis we see in the calculation of the components found in the 'PV of future SH profits' part of the EV formula? (With the exception of the release of supervisory reserves component, as I believe this should be calculated under prudent reserving basis using more conservative assumptions)
b) Is there any difference between the embedded value basis and Best estimate basis in terms of the level of conservativeness used in the assumption setting?
Appreciate your help in the above clarifications, thank you.
Nicholas