Sep 2007

[Avviey]

Hi

I have a few questions re this paper:

For a)/ii)/Q1, it says the present value of future guarantee charges on existing WP business can then be included as a new "liability". Is it included in future policyholder related liability rather than with profit benefit reserve?

For c)/iv)/Q1 on page 9, the first paragraph says,"realistic resreves for both types of without profit business (term and annuities) would increase following reinsurance..." shouldn't it decrease?

For i)/Q2 on page 11, the 2nd paragraph says, "...given high average case size..." how does average case size matter?

Thank you so much for your help.

 

[Mark Willder]

I have a few questions re this paper:

For a)/ii)/Q1, it says the present value of future guarantee charges on existing WP business can then be included as a new "liability". Is it included in future policyholder related liability rather than with profit benefit reserve?

The Examiners Report says:

"With profits benefit reserves are unchanged if retrospective (if prospective
then they would reduce). The present value of future guarantee charges on
existing with profits business can then be included as a new “liability”. This
will be a negative “liability”, i.e. will reduce total realistic liabilities."

So either allow for the future charges by reducing a prospective with profits benefit reserve, or by reducing the future policy related liability (if you calculate a retrospective with profits benefit reserve).

For c)/iv)/Q1 on page 9, the first paragraph says,"realistic reserves for both types of without profit business (term and annuities) would increase following reinsurance..." shouldn't it decrease?

No, I think the answer is correct. If the reinsurance is paid for by regular premium then we need to calculate the realistic reserve allowing for these future payments. The future RI premiums will be bigger than the best estimate of the RI recoveries, so the best estimate reserves will rise.

For i)/Q2 on page 11, the 2nd paragraph says, "...given high average case size..." how does average case size matter?

Expenses are largely per policy for these types of contracts (except for the commission which is a known amount anyway). So, as these are large contracts, the per policy expenses will be quite small. So even if expenses did cost more than expected it wouldn't make a major impact on EV. However, a small change in some of the other assumptions could have a major impact.

Best wishes

Mark

Best wishes

Mark

 

[Avviey]

Thank you Mark.

Just for the 2nd question, I see what you meant by future premium payments. But the reason I thought it should also decrease was that the insurer didn't need to hold reserve for those policies that have high claim amounts or longer than expected annuity payments. Then the following paragraph did mention ICA would be reduced, but it's due to extreme experiences, hence I don't think ICA should also allow for the normal adverse claim experiences? Does that make sense to you? Many thanks again.

 

[Mark Willder]

Just for the 2nd question, I see what you meant by future premium payments. But the reason I thought it should also decrease was that the insurer didn't need to hold reserve for those policies that have high claim amounts or longer than expected annuity payments. Then the following paragraph did mention ICA would be reduced, but it's due to extreme experiences, hence I don't think ICA should also allow for the normal adverse claim experiences? Does that make sense to you? Many thanks again.

The question says that:

"Under the new regime, “total capital required” has been defined as the sum of realistic reserves and the ICA capital requirement."

It may help to have a numerical example.

Consider the insurer without reinsurance. The realistic cost of claims is 100. However, there is a chance of much higher claims, so the ICA requires capital of 30. So the total required by the question is 130.

The insurer now chooses to reinsure some of the more extreme risks. The realistic cost of the claims transferred to the reinsurer is 40. The reinsurer adds margins, expenses and profit to this, so charges future regular reinsurance premiums of 50.

The insurer now needs to hold reserves for its retained claim exposure of 100 - 40 = 60. It also needs to reserve for the future RI premiums of 50. So the realistic reserve has gone up to 60 + 50 = 110.

However, it is now much less exposed to extreme events and its ICA drops to 15. So the total it is now required to hold is 110 + 15 = 125 (which is lower than the previous figure of 130).

So, although the realistic liabilities have gone up, the total assets required have come down because of the reinsurance.

Best wishes

Mark

 

[calibre2001]

The Examiners Report says:

"With profits benefit reserves are unchanged if retrospective (if prospective
then they would reduce). The present value of future guarantee charges on
existing with profits business can then be included as a new “liability”. This
will be a negative “liability”, i.e. will reduce total realistic liabilities."

So either allow for the future charges by reducing a prospective with profits benefit reserve, or by reducing the future policy related liability (if you calculate a retrospective)

I don't quite follow why incorporating the guarantee charge reduces the prospective reserve?

 

[Mark Willder]

I don't quite follow why incorporating the guarantee charge reduces the prospective reserve?

The question is suggesting that we charge asset shares for the cost of their guarantees. So terminal bonuses will now be lower in the future and hence with-profits payouts will be lower.

If we use a prospective method to value the with-profits benefit reserve then we must take the present value of the future payouts. Hence lower payouts (due to the guarantee charge) lead to lower reserves.

If instead we use the asset share as the with-profits benefit reserve then the current asset share is too high (as we know we will deduct a charge from this in the future). We take account of these future charges by reducing the future policy related liabilities.

Best wishes

Mark