Gross Premium Valuation

DISCOUNT RATES

Grant Mackay
8 August 2012
Aims:
 Refresher: Fair Value
— Assets
— Liabilities
— Duration

 Extraction of discount rates from published

market data
 Workshop using simple models of sample
policies:
— Term (ROP)
2
— Participating
Before we start:
Remember:

Life insurance is

1) Intangible (not physical, it’s a “promise”)

2) Contingent (mortality, maturity, surrender,

lapse,..)

3) Long Term (could be a “life time”)

For each policy, we don’t know what the actual profit will be
until that individual policy finishes.

Reporting can be likened to posting an “interim” result.

3
Gross Premium Valuation:
Definition: Gross Premium Valuation
= liability equal to the discounted value of future net cashflows

Cashflows (CF):
- Premiums GPV = - PV (CFt)
- Expenses all t
- Commission
- Contingency CFt = total net cashflow
- Death at time t
- Disablement
- Surrender =- vt CFt
- Maturity
t=0
- Tax

Does not include investment income.

- This is covered in the discount factors

4
 Schematic:
Policy data
- premium
- cover
Output:
- age/sex
Cashflow
- term 1 2 3 4
Premiums
Expenses
Valuation Model Commission
Death
Disablement
Surrender
Assumptions Maturity
Tax
- economic
- actuarial

Gross Premium Valuation

5
 Schematic: Next Steps
Policy data
- premium
- cover
Output:
- age/sex
- term 2) Build a model toCashflow
1 2 3 4

1) Will need policy project cashflowsPremiums

Expenses
Valuation Model Commission
inforce data Death
Disablement
Surrender
Assumptions Maturity
Tax
- economic
- actuarial

3) Need best estimate

Gross Premium Valuation
actuarial assumptions
5) Analyse results
4) Set economic 6
assumptions
Assumptions setting:

Economic - Actual Investments

- Investment returns - Target Investment
- Inflation Strategy
- benefits - Market indices
- expenses - Expert analysis

Actuarial - Industry experience

- Mortality - Company experience
- Morbidity - Reinsurer
- Surrender - Actuarial Investigations
- Expenses - Activity based expense costings
- acquisition - Analysis of past Earnings
- maintenance
- investment
7
-Tax
 Aims of IFRS
1. To provide a Realistic view of the financial status of the reported entity
2. Comparability:
 Across companies
 Across industries
 Across countries

Principles based:
•Published Guidelines
•Not hard-set formulae and assumptions
+Can be adapted to exactly fit the business -A range of interpretations
8
+Flexible for changing conditions -More onus on the company board and auditor
Aims:
 Refresher: Fair Value
— Assets
— Liabilities
— Duration

 Extraction of discount rates from published

market data
 Workshop using simple models of sample
policies:
— Term (ROP)
9
— Participating
 Fair Value
 Also known as “Realistic” or “Market Based”
 All components of the balance sheet
 Earnings/Profit = change in Fair Value Balance Sheet

 Assets at Market Value

 Published data (eg shares, government bonds)
 Independent assessment (eg Property)
 Linked to market data (eg non publically traded investments)
 ALL ASSETS – ie nothing is at “book value”

10
So how does this link to the valuation of
Liabilities?
All investments are, in fact, a string of cashflows:
 Bonds/Fixed interest
 A series of coupon payments plus repayment of principal
 Shares
 A series of dividends
 The capital appreciation reflects the change in value of future dividend
streams
 Property
 Rental stream, less costs of maintenance

How do markets place a value of these income streams?

11
How do markets place a value of these income
streams?
 DISCOUNTING
 Discount rate
 Time period

The market valuation of assets is driven by Discount Factors placed

on their expected income stream. Dependent on:
— Interest rates (varies by time/duration)
— Risk/liquidity premium

Assume that Government Bonds are liquid and “risk free”, ie their
coupons and redemption are “100% certain”
Then the interest rates on government bonds can be used to calculate the
discount factors for all “Certain” Cashflows:
BOTH POSITIVE AND NEGATIVE
12
The same applies to liabilities:
Discount rates
 Value cashflows according to their (investment market
related) certainty
 “Certain” cashflows should be valued as per risk free rate
 “Uncertainties” in respect of Non Investment related
Contingencies (such as mortality) are covered within the
setting of the actuarial assumptions

* The ONLY exceptions

are any cashflow
All* cashflows dependent on
should be discounted actual investment
Performance. Eg:
at the risk free rates •Par dividend
•UL fund based
payment or charge 13
 Corollaries
 Liabilities are independent of actual (or assumed future)
investment mix
 Eg An obligation to a policyholder does not change because the
investment department decided to invest in more shares
 Liabilities fall if interest rates rise
 But so does the market value of assets.
 Therefore a resultant profit or loss from interest rate changes is
dependent on the portfolio cashflow and duration matching (ALM)
— If the portfolio duration volatility (modified duration) of investments is greater
than liabilities then a reported loss results from a rise in interest rates
— Vice versa for a fall
— Also vice versa if the liabilities are of longer duration
14
 Question 1: What about Unit Linked?
 Like all insurance liabilities unit linked should be valued as the
PV of future net cashflows:
 Premiums and investment returns
 Insurance Claims, surrenders, maturities
 Expenses and commissions
 Fund growth assumptions impact the projected amounts for
surrenders and maturities
 Other cashflows are “certain”
 One approach is “strip out” the unit fund parts.
 Left with charges (on premium and funds) and expenses and
commissions
 For non fund based cashflows discount at risk free 15
 Question 2: What about Par Business?
 Like all insurance liabilities Par business should be valued as
the PV of future net cashflows:
 Premiums and investment returns
 Insurance Claims, surrenders, maturities, dividends
 Expenses and commissions
 Dividend assumptions, if commuted, impact the projected
amounts for surrenders and maturities
 Other cashflows are “certain”
 One approach is strip out the dividend part.
 Projected dividend needs to be consistent with assumed investment
return on investments
 Some countries have a cost of guarantee. This involves very complex
stochastic modelling 16
Question 3: are there other Economic assumptions?
Yes:
 Investment related expenses
 Net off discount rate
 Inflation
 General expense inflation (eg used for policy indexation) should be
consistent with interest rates
Eg long-term inflation shouldn't be higher than interest rates
 Inflation for office expenses should be consistent with budgets
 Policyholder Dividends
 Needs to be consistent with assumed investment return (ie discount rate)
on the underlying backing assets
17
 Question 4. What discount rate to use for very
long term?
 The longest available government bonds are 30 years
 But many liability cashflows extend beyond that
 Considerations:
 Use 30 year interest rate
But can lead to very volatile results
 Prescribed interest rate
But needs to be consistent with market reality
 Smoothed interest rate
Eg average 30 year rate for last 5 years,
Eg extrapolation of yield curve
Needs to be accurately prescribed
18
5. What is Matching and Duration?
 If we consider that liabilities are a series of net cashflows
 Cashflow Matching is whereby a set of assets is purchased
such that their cashflows exactly offset the liability cashflows
 If this could be achieved:
 Value of liabilities exactly = MV of assets
 The balance sheet is fully immune to changes in interest rates
 However, in practice, perfect cashflow matching is not
possible.
 A more realistic aim is to match the Duration of assets and liabilities
 If so the balance sheet is immune to small changes in interest rates
(assuming a level change)
19
 Duration
 Average (Mean) Duration:
PV of cashflows (weighted by duration they are due)
PV of cashflows
 Modified Duration:
 Derivative of (change in) price per small change in interest rates
 Modified duration = v * Mean duration
Example:
 If the $100m asset portfolio has a modified duration of 8 years:
 If interest rates rise by 0.1% then the MV of the portfolio is:
$100 * (1+(8*-0.1%)) = $99.2m, a reduction of $0.8m

 Also assume that the portfolio belongs to a life insurance company:

 Fair value liabilities of $80m
 Modified duration of 15 years
 If interest rates rise by 0.1% then the fair value of the liabilities is
$80m*(1+(15*-0.1%) = $78.8, a reduction of $1.2m

 This change in interest rates produced a net gain of $0.4m due to Asset/Liability mis-match
20
Remember:

THERE IS NO SUCH
THING AS A FREE
LUNCH!
21
Remember:
Eg arbitrarily changing
the Par dividend rate
should not create
“instant” profits

THERE IS NO SUCH
THING AS A FREE
LUNCH!
Eg changing the
assumed asset mix
should not create
“instant” Profits
22
Example: Australian IFRS
AASB 1038: Valuation of Assets

Investments backing life insurance liabilities or life

investment contract liabilities are permitted to be
measured at fair value through profit or loss under AASB
139. This is because the measurement of life insurance
liabilities under this Standard incorporates current
information and measuring the financial assets backing
these life insurance liabilities at fair value eliminates or
significantly reduces a potential measurement
inconsistency which would arise if the assets were
classified as available for sale or measured at amortised
cost.
AASB 1038 paragraph 10.2.2
23
AASB 1038: Discount Rates
1. To the extent that the benefits under life insurance contracts are not contractually linked
to the performance of the assets held, the life insurance liabilities shall be discounted for
the time value of money using risk-free discount rates based on current observable,
objective rates that relate to the nature, structure and term of the future obligations.
2. To the extent that the benefits under life insurance contracts are contractually linked to
the performance of the assets held, the life insurance liabilities shall be discounted
using discount rates based on the market returns on assets backing life insurance
liabilities.
3. In applying number 1 above, the discount rates adopted are not intended to reflect risks
inherent in the liability cash flows, which might be allowed for by a reduction in the
discount rate in a fair value measurement, nor are they intended to reflect the insurance
and other non-financial risks and uncertainties reflected in the life insurance liabilities.
The discount rates are not intended to include allowance for the cost of any options or
guarantees that are separately measured as part of the life insurance liabilities.
4. In applying number 1 above, typically, government bond rates may be appropriate
discount rates for the purposes of this Standard, or they may be an appropriate starting
point in determining such discount rates.

AASB 1038 paragraph 8.7, 8.8, 8.8.1, 8.8.2 24

AASB 1038: Deposit Components

Some life insurance contracts contain both an insurance

component and a deposit component. In some cases,
an insurer is permitted to unbundle those components

AASB 1038 paragraph 2.3.1

25
Aims:
 Refresher: Fair Value
— Assets
— Liabilities
— Duration

 Discount Rates
 Workshop using simple models of sample
policies:
— Term (ROP)
— Participating
26
Discount Rates (1/3)
 This Section discusses the proposed GPV regulation to be
implemented in Indonesia and especially on the topic of risk
discount rates to be employed in the valuation of reserves.

 To be consistent with the development of IFRS and Fair Value

Accounting, we are proposing that the expected future cashflows to
be discounted with risk free rates based observable, objective
rates that relate to the nature, structure and term of future
obligation.

 In Indonesia, this typically relates to the yield of bonds which is

issued by the Government of Indonesia, including both IDR and
USD. We can used the yield-to-maturity of the Indonesian
Government Bond to obtain the risk free forward yield at each of
the future term.

27
Discount Rates (2/3)
 In this presentation, we defined the spot yield and forward yield as
follows:

• Yield-to-maturity: is the internal rate of return (IRR, overall interest

rate) earned by an investor who buys the bond today at the market
price, assuming that the bond will be held until maturity, and that all
coupon and principal payments will be made on schedule.

• Spot Yield: is the reference to fixed-income securities reimbursed at

maturity, without any intermediate payment of coupons and/or
principal. For the purpose of this presentation, we assume the
yield-to-maturity equals to spot yield.

• Forward Yield: is the implied yield from a spot yield curve of

investment return of the instrument in the future, i.e. yield from end of
Year 1 to end of Year 2.

28
Discount Rates (3/3)
 Why is forward yield used?

• The forward yield is used because it represent the expected yield of

investment of that particular period. The methodology we have
employed in the projection is to project cashflows for a particular time
period. We then discount those cashflows using the corresponding
yield at that particular period of time.

29
Steps in getting risk free forward yield curve
1. Obtain yield-to-maturity yield curve

• Check against other source or previous period

2. Derive forward yield curve

3. Apply forward yield curve to discount projected cashflows

30
1. Obtaining risk-free rate
 The definition of risk free rates would be Yield-To-Maturity (YTM)
of both IDR and USD Indonesian government bonds.

 There are a number of sources one can obtain Indonesian

government bonds price information including:

• Data information service such as Bloomberg

• Indonesia Bond Pricing Authority (IBPA)

• Indonesia Stock Exchange (IDX)

31
Indonesia Bond Pricing Authority (Lembaga Penilaian
Harga Efek)
 On Sept 19th 2007 Bapepam-LK Regulation had issued regulation
No. V.C.3 regarding Bond Pricing Agency(LPHE). This regulation
regulates the requirements on establishment and liabilities of the
IBPA as an institution that conducts valuation on debt securities,
Sukuk, and other securities in a way that objective, independent,
credible, and accountable.

 According to Bapepam-LK circular (Normor: KEP-367/BL/2012),

effective from 1st January 2013, all mutual fund companies will be
required to use the bond price information from IBPA (LPHE) for
the evaluation of unit-price.

32
Information on IBPA website
 The following is an example of information as at 23 July 2012

33
 Getting the bond yield info from IBPA website (1/3)

Bond
Market
Data

34
 Getting the bond yield info from IBPA website (2/3)

Daily MtM
Price &
Yield

35
Getting the bond yield info from IBPA website (3/3)

36
Indonesia Government Yield Curve & Government
Bond Indicies from IBPA – taken from IDX websit

37
 Getting the bond yield info from IDX website (1/3)

Informasi
Pasar

38
 Getting the bond yield info from IDX website (2/3)

Indonesia
Government
Securities
Yield
Curve (IGSYC

39
Getting the bond yield info from IDX website (3/3)

40
2. Crossed Check Against Other Information (1/2)
 We have checked the bond yield information against Bloomberg.

41
Crossed Check Against Other Information (2/2)
 The information is mostly consistent between Bloomberg and IBPA
except for the longer date securities.
 For longer dated securities, the yield quoted by Bloomberg is lower
than those quoted by IBPA.
 Considerations from previous slide:
• Use 30 year interest rate
• But can lead to very volatile results

• Prescribed interest rate

• But needs to be consistent with market reality

• Smoothed interest rate

• E.g. average 30 year rate for last 5 years,

• E.g. extrapolation of yield curve

42
• Needs to be accurately prescribed
2. Derivation of forward yield (1/3)
 Using the information dated 23rd July as an example and yield-to-
maturity curve from IBPA. We are approximating spot rates using
the yield-to-maturity.
Term to Term to Term to
Maturity Yield To Maturity Maturity Yield To Maturity Maturity Yield To Maturity
1 4.3607% 11 5.9893% 21 6.6101%
2 4.8760% 12 6.0861% 22 6.6373%
3 5.1189% 13 6.1752% 23 6.6605%
4 5.2552% 14 6.2560% 24 6.6803%
5 5.3585% 15 6.3284% 25 6.6971%
6 5.4576% 16 6.3926% 26 6.7112%
7 5.5610% 17 6.4491% 27 6.7232%
8 5.6689% 18 6.4984% 28 6.7333%
9 5.7783% 19 6.5413% 29 6.7418%
10 5.8861% 20 6.5783% 30 6.7489%

 Derive forward yield curve from the spot yield curve using the
bootstraping formula:
• (1 + f(t-1) to (t)) = (1 + rt) t / (1 + rt-1)t-1
where
• rt : spot yield from time 0 to t 43
• f(t-1) to (t) : forward yield from time t-1 to t
 2. Derivation of forward yield (2/3)
 Using the formula from previous slide.
Rates Applicable Rates Applicable Rates Applicable
From To Forward rate From To Forward rate From To Forward rate
0 1 4.3607% 10 11 7.0268% 20 21 7.2481%
1 2 5.3938% 11 12 7.1568% 21 22 7.2101%
2 3 5.6064% 12 13 7.2503% 22 23 7.1722%
3 4 5.6652% 13 14 7.3120% 23 24 7.1367%
4 5 5.7727% 14 15 7.3472% 24 25 7.1011%
5 6 5.9545% 15 16 7.3603% 25 26 7.0643%
6 7 6.1835% 16 17 7.3572% 26 27 7.0357%
7 8 6.4273% 17 18 7.3400% 27 28 7.0064%
8 9 6.6576% 18 19 7.3165% 28 29 6.9801%
9 10 6.8613% 19 20 7.2837% 29 30 6.9550%

 Eg. for forward rate between Year 2 to Year 3

Term to
F2 to 3 = (1 + r3)3 / (1 + r2)2 – 1 Maturity Spot Yield
1 4.3607%
2 4.8760%
5.6064% = (1 + 5.1189%)3 / (1 + 4.9760%)2 - 1 3 5.1189%

44
 2. Derivation of forward yield (3/3)
 The following chart shows the spot yield and the implied forward
yield.

8,0000%

7,0000%

6,0000%

5,0000%
Yield

4,0000%
Spot Yield
3,0000% Forward Yield

2,0000%

1,0000%

0,0000%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Term (Years)

45
Aims:
 Refresher: Fair Value
— Assets
— Liabilities
— Duration

 Extraction of discount rates from published

market data
 Workshop using simple models of sample
products:
— Term (ROP)
46
— Participating
Warning – The
following are
examples only.
47
ROP Term Life (1/9)
 Product:

• 10 Year Return of Premium Term

• 50% ROP at the end of 10 years

• Surrender Value from 3rd Policy Year onwards

• Non-participating

• 100% of Sum Assured on death

• Premium is 0.5% of Sum Assured

48
ROP Term Life (2/9)
 Projection:

• Including all benefits and future cashflows:

premium, expenses, commission, death, surrender, maturity

• Projection Assumptions
• Age: 40 Male
• Premium: 100
• SA: 20,000
• Surrender: 37% / 22% / 12% / 11% ...
• Mortality: TMI2011 Male
• Investment: 7.5%
• Expenses: acquisition 20% / maintenance 2%
• Commission: acquisition 25% / renewal 5% (renewal also in Year 1)

• Reserving Assumptions:
• Margin for adverse deviation (Mfad) on Mortality: 100% -> 200% of
Projection Assumption
• Mfad on Surrender: -50% -> 50% of Projection Assumption (negative Mfad)
• Mfad on Expense: 50% -> 150% of Projection Assumption 49
• Economic assumption using the Indonesian Government Bond Yield as at
23 July 2012
 ROP Term Life – Reserving Loop (3/9)
 The following table provides a summary of the reserving / liabilities
cashflows using the example from the previous slide:

Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Premiums 8.33 80.16 75.07 67.81 63.56 59.57 55.80 52.23 48.85 47.14 46.73
Claims -5.10 -49.06 -52.55 -53.16 -55.68 -58.62 -62.27 -66.44 -70.93 -78.07 -88.04
Surrender 0.00 0.00 0.00 -0.52 -1.39 -1.96 -2.28 -2.44 -2.26 0.00 0.00
Maturity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -232.47
Commission -25.42 -4.01 -3.75 -3.39 -3.18 -2.98 -2.79 -2.61 -2.44 -2.36 -2.34
Expenses -45.25 -2.40 -2.25 -2.03 -1.91 -1.79 -1.67 -1.57 -1.47 -1.41 -1.40

Total -67.43 24.69 16.52 8.71 1.40 -5.77 -13.22 -20.82 -28.25 -34.70 -277.52

Discount Rate 4.3607% 4.3607% 5.3938% 5.6064% 5.6652% 5.7727% 5.9545% 6.1835% 6.4273% 6.6576% 6.8613%

50
 ROP Term Life – Reserving Loop (4/9)
 The following charts show the projection of net reserving / liabilities
Acquisition
Costs
cashflows using the figures from previous slide:

Valuation Net Cashflow

50.00

0.00
Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
-50.00

-100.00

Premium not sufficient to cover Net

-150.00 Cashflows
benefits & expenses at later years
-200.00

-250.00

-300.00

Maturity 51
Payment
 ROP Term Life – Projection (5/9)
 The following charts show the projection of sum assured, reserves, surrender value
and premium.

Projected Inforce

300 25,000.00

250
20,000.00

200 Surrender Value (In

Force) (LHS)
15,000.00
Statutory Liability
(LHS)
150
Annual Premium
(LHS)
10,000.00
Sum Insured (RHS)
100

5,000.00
50

- -
Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year 10 52
 ROP Term Life – P&L (6/9)
 The following table provides a summary of the Projection profit and loss
using reserve information from previous slide

Year 1 2 3 4 5 6 7 8 9 10
Premium 78.63 56.51 46.29 40.91 36.17 31.98 28.26 24.97 23.52 23.41
Investment Income 12.86 12.46 12.56 12.74 12.60 12.18 11.51 10.61 9.86 9.09
Claims 24.06 19.78 18.14 17.92 17.80 17.84 17.97 18.12 19.47 22.06
Surrenders 0.00 0.00 0.70 1.79 2.37 2.61 2.63 2.32 0.00 0.00
Maturities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 116.77
Change in reserve 167.16 1.15 4.51 0.45 -3.73 -7.45 -10.74 -12.85 -8.02 -130.49
Expenses Initial 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Renewal 1.57 1.13 0.93 0.82 0.72 0.64 0.57 0.50 0.47 0.47
Comm Initial 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Renewal 3.93 2.83 2.31 2.05 1.81 1.60 1.41 1.25 1.18 1.17

Stat Profit -160.23 44.09 32.26 30.63 29.80 28.91 27.92 26.24 20.28 22.52
53
 ROP Term Life – P&L Items (7/9)
 Projection of items in the Profit and Loss Statement

Projected Reported Results

150.00
Comm
100.00 Expenses
Change in reserve
50.00 Surrenders & Maturities
Claims
-
Bonus
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 Investment Income
(50.00)
Premium

(100.00)

(150.00)

(200.00) 54
ROP Term Life – Net Earnings (8/9)
 The following charts show the projection of profit

Projected Net Earnings

100.00

50.00

-
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 Net Cashflow
(50.00) Statutory Profit
Embedded Value Profit

(100.00)

(150.00)

(200.00)

55
ROP Term Life – Net Earnings (No Pad) (9/9)
 The following chart showing the projection of key indicators assuming
projection assumptions equal to reserving assumptions – notice all profit is
realized in Year 1.

Projected Net Earnings

40.00

20.00

-
Year Year Year Year Year Year Year Year Year Year
(20.00) 1 2 3 4 5 6 7 8 9 10
Net Cashflow
(40.00) Statutory Profit
Embedded Value Profit
(60.00)

(80.00)

(100.00)

(120.00)
56
Aims:
 Refresher: Fair Value
— Assets
— Liabilities
— Duration

 Extraction of discount rates from published

market data
 Workshop using simple models of sample
policies:
— Term (ROP)
57
— Participating
Participating(1/9)
 Product:

• 10 Year Return of Premium Term

• 50% ROP at the end of 10 years

• Surrender Value from 3rd Policy Year onwards

• Participating - Interest Bonus only based on NLP Reserve with pricing

assumption of 6.5%

• 100% of Sum Assured on death

• Premium is 0.5% of Sum Assured

58
Participating (2/9)
 Projection:
• Including all benefits and future cashflows:
premium, expenses, commission, death, surrender, maturity
• Projection Assumptions
• Age: 40 Male
• Premium: 100
• SA: 20,000
• Surrender: 37% / 22% / 12% / 11% ...
• Mortality: TMI2011 Male
• Investment: 7.5%
• Expenses: acquisition 20% / maintenance 2%
• Commission: acquisition 25% / renewal 5% (renewal also in Year 1)
• Bonus depending on the Investment Return

• Reserving Assumptions:
• Pfad on Mortality: 100% -> 200% of Projection Assumption
• Pfad on Surrender: -50% -> 50% of Projection Assumption (negative Mfad)
• Pfad on Expense: 50% -> 150% of Projection Assumption
• Economic assumption using forward yield derived from the Indonesian 59
Government Bond Yield as at 23 July 2012
• Bonus depending on the economic assumption
 Participating – Reserving Loop (3/9)
 The following table provides a summary of the reserving / liabilities
cashflows using the example from the previous slide:

Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Premiums 8.33 80.16 75.07 67.81 63.56 59.57 55.80 52.23 48.85 47.14 46.73
Bonus 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.35 -0.84
Claims -5.10 -49.06 -52.55 -53.16 -55.68 -58.62 -62.27 -66.44 -70.93 -78.07 -88.04
Surrender 0.00 0.00 0.00 -0.52 -1.39 -1.96 -2.28 -2.44 -2.26 0.00 0.00
Maturity 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -232.47
Commission -25.42 -4.01 -3.75 -3.39 -3.18 -2.98 -2.79 -2.61 -2.44 -2.36 -2.34
Expenses -45.25 -2.40 -2.25 -2.03 -1.91 -1.79 -1.67 -1.57 -1.47 -1.41 -1.40

Total -67.43 24.69 16.52 8.71 1.40 -5.77 -13.22 -20.82 -28.25 -35.05 -278.36

Discount Rate 4.3607% 4.3607% 5.3938% 5.6064% 5.6652% 5.7727% 5.9545% 6.1835% 6.4273% 6.6576% 6.8613%

60
 Participating – Reserving Loop (4/9)
 The following charts show the projection of net reserving / liabilities
Acquisition cashflows using the figures from previous slide:
Costs
Valuation Net Cashflow

50.00

0.00
Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
-50.00

-100.00

-150.00 Premium not sufficient to cover Net

Cashflows
benefits & expenses in later years
-200.00

-250.00

-300.00

Maturity 61
Payment
 Participating – Projection (5/9)
 The following charts show the projection of sum assured, reserves, surrender value
and premium.

Projected Inforce

300 25,000.00

250
20,000.00

200 Surrender Value (In

Force) (LHS)
15,000.00
Statutory Liability
(LHS)
150
Annual Premium
(LHS)
10,000.00
Sum Insured (RHS)
100

5,000.00
50

- -
Initial Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year 10
62
 Participating – P&L (6/9)
 The following table provides a summary of the Projection profit and loss
using reserve information from the previous slide

Year 1 2 3 4 5 6 7 8 9 10
Premium 78.63 56.51 46.29 40.91 36.17 31.98 28.26 24.97 23.52 23.41
Investment Income 12.91 12.50 12.60 12.78 12.64 12.22 11.54 10.65 9.90 9.11
Bonus 0.37 0.58 0.77 0.90 0.99 1.03 1.04 1.03 1.11 1.17
Claims 24.06 19.78 18.14 17.92 17.80 17.84 17.97 18.12 19.47 22.06
Surrenders 0.00 0.00 0.70 1.79 2.37 2.61 2.63 2.32 0.00 0.00
Maturities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 116.77
Change in reserve 167.73 1.11 4.50 0.45 -3.73 -7.45 -10.74 -12.85 -8.16 -130.88
Expenses Initial 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Renewal 1.57 1.13 0.93 0.82 0.72 0.64 0.57 0.50 0.47 0.47
Comm Initial 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Renewal 3.93 2.83 2.31 2.05 1.81 1.60 1.41 1.25 1.18 1.17

Stat Profit -161.13 43.58 31.54 29.77 28.86 27.92 26.91 25.24 19.3563 21.78
Participating – P&L Items (7/9)
 Projection of items in the Profit and Loss Statement

Projected Reported Results

150.00
Comm
100.00 Expenses
Change in reserve
50.00 Surrenders & Maturities
Claims
-
Bonus
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 Investment Income
(50.00)
Premium

(100.00)

(150.00)

(200.00)

64
Participating – Net Earnings (8/9)
 The following charts show the projection of profit

Projected Net Earnings

100.00

50.00

-
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 Net Cashflow
(50.00) Statutory Profit
Embedded Value Profit

(100.00)

(150.00)

(200.00)

65
Participating – Net Earnings (No Pad) (9/9)
 The following chart showing the projection of key indicators assuming
projection assumptions equal to reserving assumptions – notice all profit is
realized in Year 1.

Projected Net Earnings

40.00

20.00

-
Year Year Year Year Year Year Year Year Year Year
(20.00) 1 2 3 4 5 6 7 8 9 10
Net Cashflow
(40.00) Statutory Profit
Embedded Value Profit
(60.00)

(80.00)

(100.00)

66
(120.00)
Q&A
67
Thank You

68