Analysis of EV

Question 1

Reasons to analyse return on EV?

Answer 1

1. Needed under minimum disclosure guidance
2. Recon opening and closing EV
3. Compare actual to expected to help revise basis
4. Value of NB over year
5. Identify unprofitable contracts, so can redesign or reprice
6. Identify individual sources of profit/loss so action can be taken to increase profitable business or reduce future losses
7. Basis of remuneration
8. Information to be used as measure of performance for different areas of business
9. Validate data/calculation process

Question 2

What are the 5 main sections of the analysis of return on EV?

Answer 2

1. Opening EV
2. Operating return before tax and exceptionals
3. Return on EV before tax
4. Return on EV after tax
5. Closing EV

Question 3

To move from Return on EV before tax, to Return on EV after tax, what needs to be calculated?

Answer 3

Attributed tax

Question 4

To move from Return on EV after tax to Closing EV, what needs to be calculated?

Answer 4

Capital Raised - Capital distributed (ie. gain in capital)

Question 5

To go from Operating return before tax and exceptional items, to return on EV before tax, what needs to be calculated?

Answer 5

Investment return variance
Effect of currency movements
Effect of economic assumption changes
Exceptional items

Question 6

To go from Opening EV to Operating return before tax and exceptional items, what needs to be calculated?

Answer 6

Expected return on free surplus
Return on in-force business
Less expected return
Less experience variances
Less operating assumption changes
New business contribution
Development costs

Question 7

Calculate Opening and closing EV, Operating return before tax and exceptionals, Return on EV before and after tax:

Opening EV = 100
Expected return on free surplus = 4
Exceptional items = 5
Currency movement = 2
Operating assumption changes = 1
Economic assumption changes = 8
Attributed tax = 10
Capital raised = 9
Capital distributed = 14
Return on in force business = 20
Expected return on in force = 15
Experience variance = 4
Development costs = 6
NB contribution to EV = 1
Investment return variance = 4

Answer 7

Opening EV = 100
\+
Expected return on free surplus = 4
\+
Return on in force business = 20
-
Expected return on in force = 15
-
Experience variance = 4
-
Operating assumption changes = 1
\+
NB contribution to EV = 1
\+
Development costs = 6
= Operating return before tax and exceptionals
= 51

Investment return variance = 4
Currency movement = 2
Economic assumption changes = 8
Exceptional items = 5
= Return on EV before tax
= 60

Attributed tax = 10
= Return on EV after tax
= 50

Capital distributed = 14
= 45

So closing EV = 100+45 = 145?

Question 8

Where is the difference between expected return on free surplus and actual return on free surplus in the analysis of EV?

Answer 8

In the investment return variances line

Question 9

Explain the present value of in force business (PVIF) at time 0 and time 1. What is the discount rate used in each?

Answer 9

Present value of the sum of all future profits, where the PV is to time 0.
Present value of the sum of all future profits, where the PV is to time 1.
The PV factor is v=1/(1+r) where r is the risk discount rate

Question 10

How do you calculate the NB contribution part of the analysis of EV?

Answer 10

Project future profits from NB including allowance for expenses on acquiring NB

Question 11

IF you wanted to split the analysis of EV into 4 columns, how would you do it? Why would you do it?

Answer 11

Impact on free surplus/required capital/PVIF/total (sum of them)

Reasons to split the analysis:

1. Assess capital generation of in-force relative to NB strain
2. Mandatory under MCEV

Question 12

What approach could be used to analyse impact of experience variance?

Answer 12

Projection method from AOS

Question 13

Why would you calculate the NB contribution at contract level rather than a broad general NB?

Answer 13

1. Figure if issue with design

2. Figure if basis is appropriate

Question 14

What is an active basis? Why is it important in EV?

Answer 14

EEV principles require use of an active basis

Means investment and discount rate assumptions should be review year on year in market consistent framework

Question 15

What shouldn’t you do in the expense assumptions? What should you do?

Answer 15

Take account of anticipated future productivity gains, unless can be verified
Should consider expenses in relation to recent experience