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September 2012, Q2 ii)

M

Muskan Hamirwasia

Keen member
Hi,

I want to clarify my understanding on the answer to part (a) the realistic mortality assumptions were increased in isolation :

As per the examiner's report it states that there will be no impact on the net asset value. I want to understand that the mortality benefit payments are also part of liabilities, so if there is no change in the net asset value, is it because we are talking about change in the future which will impact the profits and not the current value of assets and liabilities
?

Please help me understand if my thinking is correct or is there some other reason behind this?
 
Muskan Hamirwasia said:
Hi,

I want to clarify my understanding on the answer to part (a) the realistic mortality assumptions were increased in isolation :

As per the examiner's report it states that there will be no impact on the net asset value. I want to understand that the mortality benefit payments are also part of liabilities, so if there is no change in the net asset value, is it because we are talking about change in the future which will impact the profits and not the current value of assets and liabilities
?

Please help me understand if my thinking is correct or is there some other reason behind this?
Click to expand...
Hi Muskan

When performing an embedded value calculation we need two different sets of assumptions as to what will happen in the future. The first is the valuation basis used to calculate the reserves (which in this question is a prudent basis). The second is the embedded value projection basis used to project the future profits (which in this question is a realistic basis).

The net assets are the assets less the reserves. So they only depend on the reserving basis. Part (a) says that the realistic embedded value projection basis is changing. So the reserving basis is unchanged and hence the net assets are unchanged.

The present value of future profits requires both bases. Profits are the premiums plus investment return less expenses less claims (these are all calculated on the EV projection basis) less the release of the reserves (which is calculated on the reserving basis). So any changes to either basis will impact the present value of future profits.

I hope this helps you follow the solution.

Best wishes

Mark
 
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