Surrender Value Profit

Hi,

the chart on page 17 of Chapter 22 gives you profit A and profit B. It says, " 'profit B' is the rest of the profit expected on the contract in PV terms". What does the rest of the profit expected on the contract refer to?

Then it says,"If the company uses a prospective premium basis(with margins) then it gives up this 'future accruing profit'. " How so??

Also on page 19, the situations 1 and 2 given say if interest rates rise late on, matched asset share drops alot and vice versa. How do you relate interest rate to matched asset share?

Seems that I'm getting confused now.

Thanks very much if anyone can help.

 

Will make an attempt, but 1st a few pts
- expected experience is the prem basis - it is a fixed set of assumptions determined at time of pricing.
- actual future experience is a set of realistic assumptions about the future and can be thought of the surrender val basis
-retro res = surrender value

1. Profit at time t = Profit from actual past experience being different from expected experience, from time 0 to time t
+
Profit from actual future experience being different from expected experience, from time t to maturity.

2. Profit at time t = (Reserve based on actual past experience - Reserve based on expected experience, from time 0 to time t)
+
(Reserve based on expected future experience - Reserve based on actual future experience, from time t to maturity)

3. Profit at time t = (EAS - SV based on expected experience) +(SV based on actual future experience - SV based on expected experience)

4. From 1&3
B - is the profit from actual future experience being different from the pricing basis.

Not sure if I actually helped here because all I did is split the bookwork into points and state stuff you probably already knew!!

For the second question - note that when you bring in margins you are effectively increasing your reserves (I think). If this reserve is used as SV, then you are effectively increasing SV.
So looking at eq 3
3. Profit at time t = (EAS - SV based on expected experience) +(SV based on actual future experience - SV based on expected experience)
the parts in red will increase and so the total in each bracket will decrease and so overall total will decrease.
That said, the first bracket is a thing of the past and so the company will not bring in margins for the part in red in the first bracket and so it is only the future accruing profit that will reduce.

For the 3rd question, not sure about the word "matched" but this is what I think.
Suppose assetshare at time 5 = £1000.
Discount this to time 0 at 4% and 5%. The PV's are £822 and 784 - a change of 5%.

Suppose assetshare at time 25 = £1000.
Discount this to time 0 at 4% and 5%. The PV's are £375 and 295 - a change of 27%.

 

Many thanks Fischer.

1) Just one thing to point is when saying "If the company uses prospective premium basis(basis with margins), then it gives up 'this future accuruing profit'." So the company uses prospective premium basis on what? I would assume on SV", then the only remaining profit is profit A. Can anyone confirm this?

2)I think the equation should be this : Profit at time t = (EAS - SV based on expected experience) +( SV based on expected experience - SV based on actual future experience)?

3)P19, So the "matched asset share drops" was referring to the present value of the matched asset share?

4) I have one more question at the bottom of page 19, it says, "an investment return lower than actual might be used to create a retrospective value lower than the "true" asset share if the company would wanted to retain some profit". How would you appreciate investment return and retrospective value?

Thanks alot.

 

EAS, Reserves on pricing assumption and realistic assumptions

I don't quite understand why the Earned Asset Share would be greater than the Reserves on both pricing and realistic assumptions?

I am particularly confused why EAS would be greater than the reserves on realistic assumptions.

Can someone please explain (maybe an example would help)

Thanks

 

The EAS is based on actual past experience and may or may not be greater than reserves either on a realistic basis or pricing basis.
If EAS is less than reserves on either basis, then the profit earned till date is < 0, which means that the first bracket in post #3 would represent a loss.

Good luck