Chapter 11 (Analysis of surplus)

Question 1

What are the two approaches used in quantifying the surplus from each source?

Answer 1

-use of formula that builds up valuation liability over the year
-non-linked contracts can use the net
premium valuation method
-can also be applied to the gross valuation
method and unit linked contracts
-projection of assers and liabilities over the valuation year and can be applied to any business
-different sources are analysed separately

Question 2

How do you calculate valuation assumption surplus

Answer 2

Value at the end of the year is recalculated using the beginning of the year assumptions.

surplus = recalculated L - original value of L

Question 3

What are the three methods that can be used to calculate the sickness surplus

Answer 3

-Manchester Unit Method
-Inception Annuity Method
-Multiple State Model

Question 4

The projection approach involves

Answer 4

1. Asset allocated to contracts are equal to value of liabilities at beginning of the year
2. Assets and liabilities are projected to the end of the year using beginning of the year valuation assumptions as expected experience
3. Values of assets and liabilities at the end of the year are calculated data from step (2) and beginning of the year valuation assumptions
4. Steps (2) and (3) are repeated, changing one ietem of experience from expected to actual.
5. Recalculated surplus at the end of the year less the surplus from previous step gives contribution from item of experience.
6. Steps (4) and (5) are repeated for each item of experience