Chapter 12: Analysis of change in embedded value

Question 1

Reasons for analysing the change: (8)

Answer 1

1. To assist in checking the calculation of the EV
2. To assist in the revision of assumptions by comparing actual experience against expected
3. To provide management with the value of the new business written in the year
4. To identify the individual sources of EV profit and loss, and so indicate areas where management action may be desirable or required.
5. To identify unprofitable contracts so that they can be redesigned, re-priced or cancelled.
6. To improve management’s understanding of the business
7. To assist in the calculation of management incentive schemes
8. To provide investment analysts and the investing public with a more realistic picture of the true underlying sources of additional value creation.

Question 2

The difference between PVIF1 (actual) and PVIF1 (expected) can mainly be ascribed to the following: (5)

Answer 2

1. Value of new business
2. Operating experience variances
3. Operating assumption and model changes
4. Investment return variances
5. Economic assumption changes

Question 3

Additional information provided by the AoEV vs AoS (IFRS basis): (2)

Answer 3

1. The value of new business sold over the period (an analysis of surplus only shows the new business strain).
2. The true impact of changes over the period that may be reduced or completely absorbed by discretionary margins.

Question 4

Embedded value of covered business (format for presentation):

Answer 4