32. Provisions TO DO Flashcards
What are provisions?
- Calculated amounts
- Need to be set aside
- Meet a provider’s future liabilities
- Depend on the assumptions used to value future E[Cashflow]
Why does a provider calculated provision?
- BAD MEDICS
- Benefit improvements for a benefit scheme
- Accounts and reports- published and internal
- Discontinuance/ surrender benefits
- Merger and acquisition
- Excess of A over L => whether any discretionary benefit can be awarded
- Disclosure information for beneficiaries
- Investment strategy
- Contribution/ premium setting
- Statutory solvency reports
What is the difference between individual and global provisions?
- Individual provisions=> Individual contract or scheme member • Global provisions=> Provider’s liability as a whole
What financial risk might a provider calculate a global provision for?
- Mismatching A and L
What non-financial risk might a provider calculate a global provision for?
- Operational risk
- What is a basis
- Collection of assumptions
What is a best estimate basis?
- Collection of assumptions=> = Prob of over stating and understating V(A) + V(L)
What is an optimistic basis?
- Assumption=> Overstate V(A) + understate V(L)
What is a cautious basis?
- Assumptions=> Understate V(A)+ overstate V(L)
What are the main factors which dictate the strength of the basis on which values should be determined?
- Purpose of the valuation
- Needs of the client
- Regulatory/ legislative requirements
How can the nature of assets held impact the liability valuation?
- L may be specifically defined in terms of the performance of A o Unit linked contract o Unit trust
- Sponsor not make up any shortfall=> Benefit payments reduced to reflect actual A available
- Market consistent valuation of life insurance financial guarantees => V(L) depend on the volatility of returns on the A held
What factors should be considered when valuing the liabilities to be shown in the providers published accounts?
- Acc principles and legislation the country concerned
Consider- going concern basis?
- Consider whether must show true and fair value
Basis required? => Prudent or best estimate?
What factors should be considered when valuing liabilities to demonstrate supervisory solvency?
- Legislation and regulation the jurisdiction concerned
Going concern basis or discontinuous basis?
- Basis prescribed or left to actuarial judgement
- Any rules or any actuarial guidance
- Regulators may want a realistic picture of a providers financial position
- Alternatively, they may wish to purposely understate the financial strength of a provider
What basis should be used when valuing the liabilities to be shown in the providers internal accounts?
- BE=> realistic pic- decision making by management
What factors should be considered when valuing the liabilities for a transfer of liabilities between two providers?
- Transferring company will prefer optimistic basis
- Receiving company will prefer cautious basis
- A BE basis is fair
- Basis used=> Bargaining power and the relative supply+ demand for liability transfer
- Possible two sides agree not to reflect a BE of future costs o Hold a margin to protect the security of benefits
What basis should be used when determining whether discretionary benefits can be awarded or benefit improvements made?
- Assumptions=> DO NOT overestimate surplus available
- Avoid pressure of distributing surplus as additional benefits
- Assumptions=> DO NOT undervalue proposed benefit improvements
- Benefits may prove in practise to be more expensive than anticipated
- Most realistic indication=> BE basis
- Cautious basis or range of assumptions may be used
What factors should be considered when valuing L to set contributions for a DB scheme, from the perspective of the trustees and beneficiaries?
- Cautious basis to ensure better security of benefits
- But not too cautious such that the sponsor: o believes cost of benefits to excessive=> reduces future benefits o Closes the scheme to future accrual o Pay high contribution rate=> insolvent
What factors should be considered when valuing liabilities to set contribution for DB scheme, from the perspective of the sponsor?
- Optimistic=> high opportunity cost of capital
- Cautious=> Higher contributions now=> more flexibility in the future
- Cautious=> High contributions now result in tax deferral
- Cautious=> Sponsor wants to be viewed as paternalistic
- Cautious=> Low opportunity cost of capital
- Cautious=> Better investment returns earned within the scheme- > lower longterm costs
- BE-stability of cost
What basis should be used when setting discontinuance terms, in order to be fair to all parties?
- BE=> Fairness for
- Discontinuing
- Remaining
- Provider
What factors should be considered when valuing the liabilities to set an investment strategy?
- A large # of different scenarios should be examined o BE and Cautious
- A stochastic model=> assess risk and values under each possible investment strategy
What factors should be considered when setting a basis for an individual targeting a specific level of return?
- Circumstances of the individual o AGE o GENDER o MARITAL STATUS
- BE=> Realistic decisions to be made
- Range of values communicate uncertainty involved
- Cautious approach=> Individual is risk averse- risk of under provision
- Chapter 33- Valuation of liabilities
