Chapter 10 - Profitability Of Existing And New Business

Question 1

Future surpluses are expected to arise on existing business mainly due to the following factors: (3)

Answer 1

1. Compulsory and discretionary margins included in the published reporting reserves (where these are calculated on the FSV basis)
2. Expected future SH CFs that were not taken into account when calculating the liabilities
3. The SH’s entitlement to a portion of the future declared bonuses on with profits business, where these have not already been included in the embedded value as part of the shareholder’s funds

Question 2

Definition of PVIF:

Answer 2

The PV of the future after tax profits from the PH’s fund

Question 3

Define Adjusted Net Worth, and give its 2 components:

Answer 3

The excess of market value of assets over EVM liabilities and is split into:
1. The free surplus that is attributed to SHs. This is the excess of A over the L and the required capital
2. The required capital. The assets attributed to the business over and above the amount required to back the liabilities whose distribution to SHs is in practice restricted

Question 4

Define required capital:

Answer 4

The assets attributed to the business over and above the amount required to back the liabilities, whose distribution to SHs is in practice restricted

The retention of capital, over and above the EVM liabilities, is required within a LI company to ensure ongoing solvency. It will reflect the company’s desire to maintain a favourable regulatory and rating agency treatment

Question 5

Cost of Required Capital definition:

Answer 5

According to APN 107:
The difference between the amount of required capital and the PV of future releases of this capital, allowing for future net of tax investment returns expected to be earned on this capital

Question 6

Key issues companies must consider when adopting the European EV framework: (3)

Answer 6

1. How to set up the appropriate RDR
2. How to calculate the cost of options and guarantees
3. What adjustments to make or the cost of capital

Question 7

Definition of VNB:

Answer 7

It is the present value of the expected after-tax SH cash flows less cost of required capital arising at the point of sale in respect of new covered business contracts sold in the reporting period

Question 8

Checks to be performed on EV: (3)

Answer 8

1. The comparison of items such as opening reserves, premiums and claims in the first year of the profit projection with the numbers in the financial statements
2. The reconciliation of expenses assumed for EV purposes to actual expenses incurred
3. The level of profit projected to be earned in the first year of the projection period, compared with actual profit earned in the previous year