Life business, embedded value and analysis of change Johan Daemen General Manager, Life insurance...
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Transcript of Life business, embedded value and analysis of change Johan Daemen General Manager, Life insurance...
Life business, embedded value and analysis of change
Johan DaemenGeneral Manager, Life insurance
Foto gebouw
4
2
Agenda
Life insurance activity & scope
Terminology
ANAV (“Adjusted Net Asset Value”) Components Roll forward 2002-2003
VBI (“Value of Business In Force”) Components Assumptions Sensitivities Roll forward 2002-2003
VNB at date of sale (“Value of New Business”)
3
Life business, overview
Growth in Total Life Premium Income 1998-2003 (‘000 EUR)
1 079 465100%
1 341 980122%
1 867 037170% 1 666 842
152%
2 230 521203%
2 547 557232%
926 707 407 478 408 475 437 679
1 259 8591 780 155
170 758 934 502
1 458 562 1 229 163
970 662
767 402
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
1998 1999 2000 2001 2002 2003
Non Linked Unit LinkedMinor changes to published figures in order to improve model accuracy
4
Life business, overview
Growth in Technical Provisions Life 1998-2003 (‘000 EUR)
4 373 520100%
5 662 602129%
6 783 772155%
7 589 874174%
8 697 296199%
10 614 953243%
4 162 741 4 467 156 4 497 804 4 637 7665 745 188
7 351 642
1 195 4462 285 968
2 952 1082 952 108
3 263 311
210 779
2 000 000
4 000 000
6 000 000
8 000 000
10 000 000
12 000 000
1998 1999 2000 2001 2002 2003
Non Linked Unit Linked
Minor changes to published figures in order to improve model accuracy
5
Scope
Subsidiaries under review :
KBC Insurance Belgium + Fidea + Vitis Life
total technical provisions : 9 987 948
Modelled: 88 % of the mathematical reserves 94.7 % of the total premium income in 2003 99.8 % of the new premium income in 2003
Subsidiaries not under review :
Central European Subsidiaries + Secura(CSOB, K&H Life, Warta Vita, Ergo)
total technical provisions : 627 0052
6
PV TiedSurplus
Life
Value In
Force
Terminology
“Embedded Value”
ShareholdersEquity
EconomicAdjustments
ANAV
=
FreeSurplus
Asinvestment
for
Embedded Value
> Equity adjustments> Asset adjustments
> Resilience Reserves > Tax assets and liab.
TiedSurplus
Life
ANAV
Other Allocated Surplus
PVFP*VBI**
(PVFP- CostTied Surplus)
TiedSurplus
Lifeor
KBC standard
Embedded Value
FreeSurplus
FreeSurplus
Other Allocated Surplus
Other Allocated Surplus
Other Allocated Surplus = Tied Surplus Non Life + Other Tied Surplus *PVFP = Present Value of Future Profit
**VBI = Value of Business In Force
7
Embedded Value : total figures
(‘000 EUR)
31/12/2002 31/12/2003
VBI LifePVFP
Cost of tied surplus
365 919511 060
(145 141)
372 798564 771
(191 973)
Tied Surplus Life* 588 026 839 837
Value In Force 953 945 1 212 635
Other Surplus 828 716 922 769
Embedded Value 1 782 661 2 135 404
* Some methodological changes took place in the calculation of the tied surplus life
8
Adjusted Net Asset Value (ANAV): composition
“Adjusted Net Asset Value” (ANAV) =
[+] Shareholders Equity
[+] Equity Adjustments “Provision for financial risks”
[+]/[-] Asset Adjustments Unrealised capital gains on the investments,
except for the bond investments in the life portfolio (“buy-and-hold”-philosophy)
Goodwill is deducted
[+] Additional Reserves Catastrophe and equalisation reserves Additional reserves life
[-] Tax assets and liabilities on the above
9
Adjusted Net Asset Value (ANAV): as at 31/12/2003
('000 EUR)
+103 105
-247 912
+127 832
+227 048
-152 379
1 7
04 9
12
1 7
62 6
06
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
shareholdersequity
equityadjustments
assetadjustments
additionalreservesNon life
additionalreserves life
tax assetsand liab.
ANAV
10
Adjusted Net Asset Value (ANAV):Change 31/12/2002 – 31/12/2003
+ 274 705
- 134 853
+ 228 980
- 23 008 1
416
782
1 7
62 6
06
0
200 000
400 000
600 000
800 000
1 000 000
1 200 000
1 400 000
1 600 000
1 800 000
2 000 000
Anav31/12/2002
Profit in 2003 DividendsPaid
Asset ValueAdjustments
Other Anav31/12/2003
11
ANAV: KBC RBC requirementsfor Life business
KBC RBC Requirements(legal requirements)
% of the reserves
% of sumat risk
Unit Linked with legal SM > 0 1.25%(1%)
0.375%(0.3%)
Unit Linked with legal SM = 0 0.5%(0%)
0.375%(0.3%)
Non Linked Pension products75 F.I./ 20 S./ 5 P. mix
10.2%(4%)
0.375%(0.3%)
Non Linked Investment products 87 F.I./11 S./ 2 P.mix
7.97%(4%)
0.375%(0.3%)
The current RBC for Life activities is 215 % of the legal required solvency margin for the Life Activity
12
Value of Business in Force (VBI): Economic Assumptions
2002 2003
10 year bond yield
(Rate from 2006 on)
4.40% pa
(5.00% pa)
4.17% pa
(5.00% pa)
Risk Prem. on equity 2.50% pa 2.50% pa
Risk Premium used for discount rate 3.50% pa 3.50% pa
Discount rate* (= Cost of Capital) 8.50% pa* 8.50% pa*
Wage inflation
(Rate from 2006 on)
2.80% pa
(3.00% pa)
2.90% pa
(3.00% pa)
* Based on the bond yield in the long run
13
Value of Business in Force (VBI): Non Econonomic Assumptions
Expenses Expenses are allocated to the different products and activities in
such a way that the total expenses in the study equal the total expenses in the statutory accounts
Expenses increase with expected wage inflation 2-3% per annum Future expense reductions programs and synergies are not taken
into account
Mortality Assumptions based on most recent industry experience were used
Lapses Assumptions based on annual experience, investigations of
surrenders and paid-ups, with a reasonable safety margin Assumptions are set on by product and distribution
channel
14
Value of Business in Force (VBI): Overview
(‘000 EUR, only reserves of modelled business)
PVFP VBI VIF PVFP/reserves
VBI/res.
reserves
2002 511 060 365 919 953 945 7.19% 5.15% 7 104 098
2003 564 771 372 798 1 212 635 6.45% 4.26% 8 756 832
15
+ 10% - 10%
Expenses - 4.77% + 4.77%
Lapses - 2.18% + 2.35%
Mortality - 3.35% + 3.36%
+ 0.5% - 0.5%
Discount rate - 7.59% + 8.09%
Investment Return* + 8.49% - 9.34%
Value of Business in Force (VBI): Sensitivity Analysis
Effect on VBI
* The discount rate is changed consistently with the change in investment return. No profit sharing was given to the 4.75% guarantees in the policies.
16
Value of Business in Force (VBI): Sensitivity Analysis
Current RBC KBC Insurance
100% of the legal
SM
150% of the legal
SM
200% of the legal
SM
Embedded Value 2 135 404 2 238 180 2 193 649 2 149 118
VIF 1 212 635 866 743 1 017 797 1 168 851
VBI 372 798 475 574 431 043 386 512
Changing the solvency margin
(‘000 EUR)
17
Value of Business in Force (VBI):Change 31/12/2002 – 31/12/2003
(EUR)
-36 357 152
+14 416 570 +53 016 901
-61 265 326
+31 570 445
+3 159 540 +2 338 592
365
918
865
372
798
434
200 000 000
250 000 000
300 000 000
350 000 000
400 000 000
450 000 000
VBI 31/
12/2
002
mod
el Cha
nges
Chang
e no
n ec
on. a
ssum
ption
s
Unwin
ding
disco
untin
gCas
hflow
to A
NAV
VNB as o
f 31/
12/2
003
Varian
ces o
ver 2
003
Chang
e ec
on.a
ssum
ption
sVBI 3
1/12
/200
3
18
Value of Business in Force (VBI): Change 31/12/2002 – 31/12/2003
Effect of ‘new business’ sold in 2003 (as at 31/12/2003): EUR
APE (Annualised Premium Equivalent)
PVFP of new business at 31/12
VNB of new business at 31/12
PVFP as % of APE
VNB as % of APE
2003 210 834 91 087 53 017 43.20% 25.15%
(‘000 EUR)
Non-Linked83%
Unit Linked17%
19
Value of New Business (VNB): New business 2003 at date of sale
APE (Annualised Premium Equivalent)
PVFP VNB PVFP as % of APE
VNB as % of APE
Total 210 834 76 804 38 649 36.43% 18.33%
(‘000 EUR)
Non-Linked70%
Unit Linked30%
20
Review
Lane Clark & Peacock Belgium reviewed the methodology and assumptions used by KBC Insurance in the determination of the Embedded Value at 31/12/2003, the Value of 2003 New Business and the analysis of the change in the value of in-force business for the Life Insurance activities of KBC Insurance.
It is the view of Lane Clark & Peacock Belgium, based on the data made available, that the assumptions used are reasonable and that the methodology used by KBC Insurance is in line with basic principles described in appropriate literature.
Our assignment included a review of the calculations.This review was not a detailed verification of the correctness of all calculations. This review was a limited high-level reasonableness checks on the results and included a detailed review on a limited part of the insurance portfolio of KBC Insurance. No material issues have been discovered.
Therefore, based on our work and our validation report on the work carried out by KBC Insurance, we consider the embedded value, the value of new business and the analysis of the change in the value of in-force for the life business to be reasonable and suitable for inclusion as supplementary information to the Group’s consolidated accounts.
21
Cautionary Statements
Embedded Value is the result of cash-flow projections with underlying assumptions and expectations. The values in this presentation are calculated on a deterministic basis.
Many assumptions like general economic conditions, performance of financial markets, taxes, changes in laws, frequency and severity of insured loss events, mortality and morbidity levels and trends, and others are beyond KBC’s control. A modification of assumption can result in a significantly different Embedded Value. Deviations from assumed experience are normal and are to be expected. Even without any change in the parameters, actual results will vary from those projected due to normal random fluctuations.
Embedded Value cannot be considered as an absolute value. This value together with a sensitivity analysis allows the recipient to obtain an idea of the magnitude of the expected value created by their insurance activities.
Under no circumstances should the inclusion of the projections (including the relevant underlying assumptions and expectations) be regarded as a representation, warranty or prediction that the business will achieve or is likely to achieve any particular results.