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SA2 April 21 Analysis of change in SII BEL

A

Anjulee Greenbank

Member
Hi

I failed SA2 in April 21 and I'm just trying to learn from where I went wrong.

I struggled with Q2 relating to the analysis of change of SII BEL. Where can I find the notes on this please? I can only find notes on analysis of surplus or analysis of change in EV.

I am confused also why expenses being higher than expected does not lead to an experience variance in the analysis of change in BEL?

Thanks in advance!

Anjulee
 
Hi

At SA level, a large proportion of the questions will not have answers that come directly from the course notes - they require adaptation of the underlying principles learned within the course to unfamiliar situations, and this question is a very good example of that. It requires blending of understanding of analysis of surplus with understanding of the calculation of the BEL.

An 'analysis of surplus' is an analysis of the change in surplus over the period. If we define surplus simplistically as 'assets minus BEL' then an analysis of surplus is basically an analysis of {change in assets minus change in BEL}. So an analysis of the change in BEL must have similarities to an analysis of surplus, hence we can use the Core Reading on analysis of surplus as our starting point. However, we need to ignore any components that relate to a change in assets. Actual expenses incurred during the period will impact the amount of assets held by the company.

Change in BEL = BEL at end minus BEL at start. Think about how the BEL is calculated (ie the present value of particular cashflows on a best estimate / market-consistent basis) and therefore how it changes over the year.

You will find more details on how to understand this solution in our April 2021 Mini-ASET product, which should be available soon (in eBook format): see https://www.acted.co.uk/paper_aset.html
 
Thanks for your quick response.

I think I understand better now.

So just to clarify…

we wouldn’t allow for expenses change over the year as an experience variance because there would be no change to the end of year BEL, it would still be based on the same expense assumption as this hasn’t changed.

One thing I don’t understand is, why do we allow for expense inflation being different to expected?

thank you so much for your help!
 
Yes, that's broadly correct (it's a little more complicated than that, as set out in ASET, but you're along the right lines).

Re expense inflation:

Let's say that the start year BEL assumed that renewal expenses would be 10 per annum in the first projection year, inflating at 5% pa thereafter.
Then (assuming that everything has gone the way we expected it to during the year) we would expect the year end BEL to be assuming expenses of 10.5 per annum (= 10 x 1.05) in the new first projection year, inflating thereafter at 5%. [Think about the BEL calculation: when we move forward a year, the items in what was the first year have 'dropped out' of the calculation, and the items from what was the second year onwards would be the same but just now one year closer - assuming of course that everything has happened as it was expected to happen during the year.]

But if actual inflation during the year was 3% rather than 5%, the year end BEL would likely be assuming expenses of 10.3 per annum in the first projection year, inflating thereafter at 5% (assuming no changes to the future inflation assumption).

Hence we have a difference between the actual year end BEL and the expected year end BEL due to the actual inflation during the year differing from what we expected it to be.

As we explain in ASET, experience variances that only impact cashflows arising during the analysis period (such as expense over-runs that are not expected to continue in the future) would not be relevant to the analysis of change in BEL. But experience variances that do impact the future cashflows valued in the BEL would be relevant.

Hope that helps.
 
Hi, in relation to this question itself, I was wondering -
in part iii, the expenses being higher than originally expected at start of the year - why would this not be an experience variance? I think I've not completely understood some aspects from your last reply, which could perhaps be the answer to my question

thanks
 
Just one more thought, I was quite confused when I read the part ii of this question - discuss the components likely to be included in an analysis of change - I could think of the components more on the lines of AoS obviously - was that the right way to go about it and then gradually apply it to change in BEL?
Also I didn't know if discuss was the appropriate command verb?
 
That list of components is a great starting point, but of course you need to filter carefully to make sure that you are only covering those that impact the BEL, so some would need to be adapted accordingly and some would not be relevant.
 
Ekta Mehta said:
Hi, in relation to this question itself, I was wondering -
in part iii, the expenses being higher than originally expected at start of the year - why would this not be an experience variance? I think I've not completely understood some aspects from your last reply, which could perhaps be the answer to my question
thanks
Click to expand...

Expenses being higher than expected would mean the assets at the year end are lower than they would otherwise have been (spent more money than expected) but this doesn't directly impact the BEL - so is not relevant here.

The only way in which the BEL would be impacted would be if the insurer decided that its view of future expenses has now changed as a result of the over-run. But that would be an assumption change, not an experience variance.
 
Hi,

I have been struggling with this question but I just want to clarify my understanding...

The BEL is based on best estimate assumptions, which is why we do not need to account for the actual vs expected over the year?

I understand the reason we don't allow for expenses is because for the BEL we will continue using the BE assumption and don't take into account the actual expenses over the year (unless the assumption has been changed as a result of experience analysis - which would be included in the opening adjustments?)

But we allow for the impact of actual mortality experience... is that because in this case, whilst we are still using the best estimate assumption for the BEL, the expected future cashflows will now be lower (as we would have stopped paying the annuity income payments for those).
 
AKS01 said:
Hi Lindsay,

I have been struggling with this question but I just want to clarify my understanding...

The BEL is based on best estimate assumptions, which is why we do not need to account for the actual vs expected over the year?

I understand the reason we don't allow for expenses is because for the BEL we will continue using the BE assumption and don't take into account the actual expenses over the year (unless the assumption has been changed as a result of experience analysis - which would be included in the opening adjustments?)

But we allow for the impact of actual mortality experience... is that because in this case, whilst we are still using the best estimate assumption for the BEL, the expected future cashflows will now be lower (as we would have stopped paying the annuity income payments for those).
Click to expand...

Yes, correct
 
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