Chapter 12 - Analysis Of Change In EV

Question 1

Reasons for analysing the change in EV: (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 the management with the value of the mew 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, repriced, or cancelled
6. To improve management’s understanding of 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 the actual and expected PVIF at the end of the year can be due to: (5)

Answer 2

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