ANALYSIS OF SURPLUS Flashcards
Different reasons for carrying out AOS
financial effects
- shows the financial effect of divergences of A vs E in the valuation basis
- shows the financial effect of writing new business.
checks
- can be checks on the valuation data and results (checking of items of surplus for reasonability + consistency checks)
recurring things
- trends in the items of surplus may give useful information on trends in the experience of the company.
new things
- may assist in the distribution of surplus by identifying items of surplus that are unlikely to recur.
- new items identified in the analysis may be used to inform the risk identification process.
- analyse the effect of policy alterations.
future things
- assist in setting future assumptions.
regulatory related
- assist in decisions such as derisking the balance sheet in order to protect solvency levels.
- required as part of the regulatory returns.
What are the different sources for changes in surplus?
l Change in valuation assumptions
l Release of Contractual Service Margins (published reporting only)
l Release of risk margin / risk adjustment
l Expected profit margin on group products (published reporting only, when using the PAA)
l Actual vs. expected investment return
l Actual vs. expected expenses
l Actual vs. expected mortality
l Actual vs expected sickness / morbidity / disability
l Actual vs expected other risk benefits (e.g. retrenchment)
l Actual vs. expected withdrawals
l Actual vs. expected charges under unit-linked and unitised with-profits contracts
l Actual vs. expected tax
l New business
l Other policy alterations/changes
l Changes in maturity guarantee reserves
l Exercise of options and guarantees.
What does AOS result in?
Improve product design (e.g., reduce mortality charges if consistently profitable)
Update assumptions for future valuations
Identify problem areas needing attention
Make strategic business decisions
What are the reasons for analysing change in EV?
financial effects
- shows the financial effect of divergences of A vs E in the valuation basis
- shows the value of writing new business in a year
checks
- can be checks on the EV calculation
recurring things
- trends in the items of surplus may give useful information on trends in the experience of the company.
new things
- may assist in the distribution of surplus by identifying items of surplus that are unlikely to recur.
- new items identified in the analysis may be used to inform the risk identification process.
- analyse the effect of policy alterations.
future things
- assist in setting future assumptions.
regulatory related
- assist in decisions such as derisking the balance sheet in order to protect solvency levels.
- required as part of the regulatory returns.
Why was the formula approach well suited for net-premium valuation non-linked products?
- liabilities of non-linked products are not heavily dependent on investment returns
- the simpler the product, the less drivers of profitability to consider
- in net premium valuation there is a clear difference between elements which create a reserve (mortality and interest) and what creates profit (lapses, expenses etc.)
What is the difference between AOS and AOEV?
AOS looks at the change in an insurer’s surplus (assets minus liabilities) over a specific period.
- identifies specific drivers like mortality/morbidity experience, investment returns, expenses, etc.
- compares actual experience to expected assumptions
- often used for statutory reporting and management information
- usually backward-looking, explaining what happened in the past period
AOEV looks at total economic value of an insurance business (ANW, PVIF).
- looks at total economic value rather than just accounting surplus
- proof of value creation for shareholders
- includes risk adjustments and the cost of required capital
- forward-looking by nature, projecting future cash flows
- often used for business valuation, M&A activities, and performance measurement
Compare and contrast the formula approach and projection approach.
Formula approach
- works well for simple products
- order not as important
- includes loads of timing approximations (1 + 0.5i)
- uses mostly actual values
Projection approach
- actual cashflow timing used
- works well for complex products (guarantees, options etc.)
- requires lots of assumptions
When calculating EDS how do you decide on k1 and k2 factors?
When policies are in force the whole year
k1 is 1, because the policies have been exposed to mortality risk the whole year
k2 is 0.5, because we assume deaths occur halfway through the year
When policies are in force for half of the year (due to joining later in year/withdrawal)
k1 is 0.5, because policies have been exposed to mortality risk for half of the year
k2 is 0.25, because we assume deaths occur halfway through the exposed period
