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Sept 2016 - Q2 iii - BEL calculation for UL

Discussion in 'SA2' started by Viki2010, Aug 4, 2017.

  1. Viki2010

    Viki2010 Member

    Hi, the ASET solution breaks down the calculation of BEL into three components with a note that the BEL for GAO "may be" calculated separately.

    Would it still be correct to break down the calculation of BEL into two components for UL product?
    1. BEL unit reserve
    2. BEL non unit reserve including the GAO reserve which is a guaranteed non-unit benefit?

    If yes, then the BEL non unit would be calculated stochastically and the cashflows would include the PV benefits (GAO) + PV expenses - PV premiums (non unit allocated) - PV fixed charges.



    Calculation of PV of guaranteed annuity:

    1. Could this calculation be carried out by using simulated RFR from ESG and annuity factor modelled in the projection model?
    2. The ASET solution describes - for example - "the market annuity rate should be taken from an observed open market annuity simulated using RFR" - how can this be modelled in a stochastic model? I am trying to envision the practicalities.
     
    Last edited by a moderator: Aug 4, 2017
    Viki2010, Aug 4, 2017
    #1
  2. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Yes, that's correct: the GAO component is part of the non-unit reserve and so the calculation can be done in two rather than three parts.

    Annuity rates are based directly on interest rates. At the point at which the potential cost of the GAO is being determined within the model, an annuity factor can be determined using the ESG interest rates applicable to that particular simulation and at that point in time. This would be done for each maturity date and each simulation.
     
    Lindsay Smitherman, Aug 7, 2017
    #2
  3. Mbotha

    Mbotha Member

    If there were no guarantees in this product, would we still model the non-unit reserve stochastically (stochastic investment return variable to project the fund value for the purpose of calculating charges which are expressed as a % of fund value)?
     
    Mbotha, Sep 10, 2017
    #3
  4. Viki2010

    Viki2010 Member

    Companies don't model unit linked stichastically if it doesn't contain guarantees or options.
     
    Viki2010, Sep 10, 2017
    #4
  5. Mbotha

    Mbotha Member

    So is it just projected using the risk-free curve then?
     
    Mbotha, Sep 12, 2017
    #5
  6. Viki2010

    Viki2010 Member

    I think so. The investment return can be based on base scenario from esg -risk neutral.
     
    Viki2010, Sep 12, 2017
    #6

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