Originally Posted by
Snoopy
'Difference between actual and assumed experience'
This term is further explained in AR2019 p93 under the heading 'sensitivity analysis'. The conceptual problem I have with this phrase is that it seems to encapsulate both things that are part of normal business practice and those that aren't. Specifically with the five sub-categories this phase apparently encapsulates:
1/ Expense Risk: If your costs go up because of inflation more than you plan for then your profits will decrease - Rather obvious I think
2/Interest rate Risk: Investment income will decrease as interest rates on the underlying fixed interest vehicles decrease. However, this can be offset by the capital value of underlying bonds increasing. - Not rocket science here
3/ Mortality rates: Death triggering the cashing out of life insurance policies means lower profits (less premiums being paid) and reduced shareholder equity. - I question this one because, if I interpret this correctly, the shareholder equity paid out in settlement of a life insurance policy was always going to be paid out eventually. Thus calling it 'shareholder equity' smacks of taking someone's life insurance actuarially based entitlements and calling that 'company money'. Can an insurance company really claim a policy holders entitlement as their own?
4/ Discontinuence: This seems to be used in the sense of people stopping payments towards their life insurance policy. Turners say this is generally negative. That makes sense if you consider that as a result of discontinuence Turners loses an income stream to invest. But how can they lose 'shareholder equity' if the money they were holding to support these life insurance policies was never theirs in the first place?
5/ Market Risk: For fixed future payouts that are supported by market investments, if the market goes down then Turners may have to stump up cash to make up the difference. - That is a fair point. But markets tend to go up and down. So should annual investment volatility be included as a profit ingredient when the underlying profits or losses are accumulated and may not be paid out for years or even decades?
In summary, while some 'Difference between actual and assumed experience' risks are immediate and legitimate to feed into annual profits, some are not. In particular the implied 'mixing of customers entitlement' with 'company money' should not in my view be any reflection of the operational performance of the business.
My position on 'Difference between actual and assumed experience' adjustments has thus far has been to ignore them. But by doing so I could be ignoring genuine gains or losses that should accrue to shareholders.
However, if I include them, then it seems I am including gains that will accrue to policyholders for which shareholders will have no ultimate entitlement. Thus no matter which of these two decision paths I choose to take I will end up with the wrong answer. And there is my dilemma.