EEV vs. Solvency II

[phuang8]

Hi, I am trying to do some P&L attribution test on the surrender impact on the own fund/ net worth . Can anyone exaplain why under the EEV, this impact will be actual surrender payment - reserve release from the reserves, but under S II, this will only be the actual surrender payment solely with no reserves effect?!? thanks!

[sohpmalvin]

I could be wrong, but my guess is because under SII we only have one reserving basis-the best estimate liability, which is in essense the in-force value. There is no reserve to release. Whereas for EEV, the valuation includes prudent basis and best-estimate basis. The surrender impact only affects the best-estimate basis, therefore the release in reserve needs to be considered (as in wheether the release in reserve is adequate to cover the loss due to the surrender).

[phuang8]

Sorry I may be stupid to ask this, but do you mean under SII you dont have the surrender risk considered in BEL so there is nothing to release, whereas under EEV, the prudent basis part will include the surrender considerations and therefore, when policy surrender, the reserves will move out. THanks!

[sohpmalvin]

I understand it this way- the BEL is the negative of VIF on cash flow that has no reserve. The cash flow is without the support of any reserve. Shocking the surrender risk would affect both the cash flow and the BEL, but the difference in BEL is due to the difference in cash flow, not another way round.

Whereas for EEV, the valuation cash flow is not affected when the surrender risk is stressed. The valuation cash flow is the same regardless of the risk scenario. Therefore, the best estimate (well it is no longer best estimate since it is stressed) cash flow needs to be considered together with the release in reserve, to see whether the reserve is prudent enough.

[sohpmalvin]

Technically the reserve release would be affected by the stress in surrender risk, since the number of policy is different from base. That's the reason why we need to put the change in reserve together with the best estimate (stressed) cash flow to see the impact on the company value.