CH 14 (WM) Flashcards
Define the term Embedded Value. [3]
The shareholder-owned share of net assets, where net assets are defined as the excess of assets held over those required to meet the liabilities.✓✓
These assets may be valued at MV or may be discounted to reflect “lock-in”✓✓, for example if they are required to be retained within the fund to cover the solvency CR’s.✓✓
+ ✓
The PV of future shareholder profits arising on existing business.✓✓
The process of determining this amount is similar to performing a profit test, bearing in mind that some elements will not be applicable✓✓ (e.g. new business expenses).✓
Describe the calculation of EV for different types of business. [3.5]
CWOP business – the PV of future premiums plus investment income less claims and expenses, plus the release of supervisory reserves. [1]
UL business – the PV of future charges (incl. surrender penalties) less expenses and benefits in excess of the unit fund, plus investment income earned on the release of any non-unit reserves. [1]
For WOP business, EV is effectively the release of any margins within the supervisory reserves relative to the assumptions used within the EV calculation. It is important that the reserves used in the determination of net assets are consistent with those used in the determination of the PV of future profits. [1]
Tax is allowed for within the calculation as appropriate. ✓✓
State the reasons why a health insurance company may want to analyse the change over a year in its embedded value. [3]
- To validate the calculations, assumptions and data used.✓✓
- To reconcile the values for successive years.✓✓
- To provide management information.✓✓
- To provide detailed information for publication in the company’s accounts✓✓ or those of any parent company✓, in particular the value of any NB taken on by the company.✓
- Help set executive remuneration.✓✓
Define the term Appraisal Value. [2.5]
The starting point in valuing a long-term insurance company for merger or acquisition will be the EV.✓✓
However, an important element of the price is likely to be goodwill, corresponding to the estimated profits expected from future business.✓✓
This is because the company should be able to use its expertise and brand name to add value to the business through sale of profitable new business in the future too – and this will be represented by the goodwill element of the purchase price. [1]
The sum of the EV and goodwill is generally known as “appraisal value”.✓✓
State some of the purposes of EV calculations. [2.5]
- to establish a value of the business, for internal purposes ✓✓
- to include in published financial statements ✓✓
- to assess the major part of an appraisal value for sale or purchase ✓✓
- to analyse future surpluses for RI embedded value financing ✓✓
- to assess growth in EV for the payment of bonuses to staff or salespeople ✓✓
Explain the term Reinsurance EV Financing. [2]
It is a type of Fin Re ✓ under which a reinsurer advances a loan (often expressed as commission) ✓✓ to an insurer ✓,
in return for a stream of future surpluses that will arise for IF business ✓✓,
reflecting any prudence in the valuation basis.✓✓
What is the key determinant in deciding on a suitable EV basis? [0.5]
The purpose for which the EV is being calculated.✓✓
List the general considerations when setting assumptions. [4]
When setting assumptions it is important to:
- consider the use to which the assumption will be put ✓✓
- take particular care over assumptions with the most financial significance ✓✓
- achieve consistency between the assumptions ✓✓
- consider any legislative or regulatory constraints ✓✓
- consider needs of clients ✓✓
- ensure that the parameters are produced accurately from the data ✓✓
- ensure data that the data used to derive assumptions are relevant to insured lives ✓✓
- ensure that bases used are flexible to reflect changing risk circumstances ✓✓
Describe how to derive assumptions for pricing purposes. [0.75]
The starting point is a best estimate basis for the assumptions✓✓, however, margins will be necessary to guard against adverse future experience.✓
How may the risk from adverse future experience be allowed for in a cashflow model? [1.5]
- through assessing what margins to apply to the expected values ✓✓
- through using a stochastic approach ✓✓
- through the risk element of the risk discount rate ✓✓
The margins incorporated and the price charged will depend on which factors? [3.25]
- the competitive nature of the market ✓✓
- the company’s USP ✓✓
- the company’s attitude to risk ✓✓
- the credibility, accuracy, relevance and “up-to-date-ness” of the data ✓✓✓✓
- the size of the company’s free assets ✓✓ or parental guarantee ✓
