Analysis of Surplus

Question 1

Reasons to analyse the change in surplus.

Answer 1

1. Financial effect of actual vs. expected (in valn basis) peak 1/2
2. Financial effect of writing NB on surplus
3. Recon between opening and closing surplus. Can be used to explain the change in free assets or wc (pk 2)
4. If independent of valuation data, check on data and process
5. Regulatory requirement to analyse WC (peak 2)

Question 2

Why won’t a peak 1 analysis of surplus be that useful? What are its uses for peak 1?

Answer 2

1. Valuation basis is prudent
2. So we see release of prudent margins causing a surplus
3. Which means we don’t see the picture of performance
4. The uses of it are:
   a) Check on valuation data and process
   b) Explain changes in regulatory surplus over year

Question 3

What are the sources of peak 1 surplus?

Answer 3

1. Change in assumptions
2. Model/regulatory changes
3. Corrections
4. Actual vs. Expected -
   a. Investment return
   b. Expenses
   c. Mortality/morbidity
   d. Exits (withdrawals/retirements)
   e. Charges for UL and WP
   f. Tax
   g. NB

Question 4

Approaches to quantify regulatory surplus arising from each source of peak 1 surplus

Answer 4

1. Misc items e.g. mc1 assessed separately as first step
2. Investment return on assets above regulatory liabilities on actual vs. expected basis
3. Two approaches otherwise:
   a) Project A and L over year, use for any type of business
   b) Formulae approach, non-linked without profit business, complex

Question 5

What are the steps in the projection approach?

Answer 5

1. Set A=Reg L from time 0
2. Proj A and L to end of year using time 0 assumptions as expected experience
3. Calculate A and L at time 1 using data from (2) and time 0 valuation assumptions, this gives us surplus expected at time 1
4. Repeat (2) and (3) changing one item of experience at time from expected to actual assumption
5. Recalculate the surplus at time 1, this number minus (3) gives contribution of THIS ITEM to surplus
6. Repeat (4) and (5) for each item.

e.g.

At time 0, surplus =0
At time 1, expected surplus = 10
Update investment return
At time 1, expected surplus after actual inv ret = 14
So contribution to surplus of inv ret = 14-10 = 4
Update actual expenses
At time 1, expected surplus after actual inv ret + exp = 16
So contribution to surplus of expenses = 16-14 = 2
etc.

Question 6

How do we analyse change in MCR, when do we analyse change in LTICR

Answer 6

1. Only analyse LTICR if regulatory basis only firm
2. Need to capture impact of each change in assumption on MCR
3. Includes factors that cause surplus plus change in asset mix and change in strength of test used to calculate MCR

Question 7

What is working capital? Why analyse the change in WC?

Answer 7

WC = market value of assets - realistic liabilities before RCM
Why analyse change in WC?
1. Required in peak 2 reporting
2. Check of WC calculation
3. Help with management of fund e.g. de-risk balance sheet

Question 8

What are the drivers of change in WC?

Answer 8

1. Opening adjustments
   e. g. method/model changes or corrections
2. Economic variance
   e. g
   a. investment returns on WC
   b. mismatch of A and L e.g. when yields change A and L don’t change exactly the same
3. Insurance variance - change in demographic/operations
   e. g.
   a. Mortality
   b. Persistency
   c. Expenses
4. New business
5. Other e.g. capital injection into fund
6. Unexplained - target a percentage of liabs

Question 9

How do we analyse movement in the RBS?

Answer 9

1. Rerun time 0 model

Opening adjustments and insurance variances:

2. Make model changes etc.
3. Change long term assumptions from time 1 onwards

Economic variance:
4. Roll forward to time 1 using actual economic conditions

5. Add NB
6. Actual insurance experience
7. End year RBS model - (6) = unexplained

Question 10

Why do we do an RCM AOC
Why wouldn’t we do it
How do we do it?

Answer 10

1. Management information for key solvency number
2. Not requirement
3. Repeat AOS steps for most adverse scenario, take into account where stresses change

Question 11

How are the results of movement analyses used?

Answer 11

1. Decide NB limits for new year
2. Revise Peak 1 prudent assumptions if trend of negative surpluses (insufficient prudence in assumptions as if correct, should show positive surplus)
3. Help de-risk balance sheet to protect solvency

Question 12

How do we do formula approach?

Answer 12

Learn the notes for unit 9