It A05Q5iii, it mentions about statutory value of the liabilities. I "guess" that statutory value of the liabilities should be a discounted value of liabilities only. However, according to the exam report, statutory value of the liabilities seems to represent "liability less asset", because of the followong sentence in the exam report "the valuation interest rate change also changes the amount of the net premiums meaning that the liabilities are less sensitive than assets of a similar term" Any idea?
Hello I have not looked at the question recently, but if I remember from what I had seen - it talks about a net premium valuation. First, you are correct in saying that the stat val of liabs is the disc val of liabs. Note that the liabs here are the reserves. Next, what the exam report is getting at is, when you do a net prem val, the first thing you do is work out the premium again for the same contract but using the new pricing assumptions on the date of valuation. Then you plug this new premium in the net prem valn formula: Reserve = S.(assurance factor) - P*(annuity factor) Note* P* is the premium worked out using pricing assumptions at time t. As it is a net prem valn, we will use the net prem and (obviously) NOT THE GROSS PREMIUM. No allowance for the expenses. Reserve will be affected by the assurance factor (based on interest and mortality assumptions on valuation date), the annuity factor (based on interest and mortality assumptions on valuation date), and also the premium P*(based on interest and mortality assumptions on valuation date but original sum assured). So, as the assurance and annuity factor change due to change in valuation interest rates, P* will also change so that the sensitivity of the Reserve to changes in the valn int rates will be lower. Hope this helps. I'd suggest if you have the time, do a proper example to see how this works. Should not take too long. Good luck
