9.4. Prudential supervision reporting

Question 1

Which legislature underlies the calculation of SAM TP?

Answer 1

• FSI 2
• FSI 2.2
• GN 2.2

Question 2

What is the method for calculating technical provisions?

Answer 2

Technical provisions are calculated using market consistent principles.

Question 3

How is Best Estimate Liability (BEL) calculated?

Answer 3

BEL is calculated as probability weighted cash flows plus risk margin.

Question 4

What should assumptions in BEL calculations reflect?

Answer 4

Assumptions should reflect characteristics of the underlying portfolio.

Question 5

Can you summarise how the TP are calculated?

Answer 5

• Calced using market consistent principles
  
  1. BEL calced as probability weighted CFs + Risk margin
  2. Or can be calculated as whole if L’s CFs can by replicated in all possible scenario by A/portfolio of A traded in active market&raquo_space; TP = market value of asset(s)
• BEL must be gross of reinsurance
• Reinsurance recoverables net of counterparty default risk shown separately as A in balance sheet
• Can use simplifications ensuring actuarial and statistical methodologies are proportionate to scale and complexity of underlying risks

Question 6

Explain how the SAM BEL is calculated

Answer 6

• Discounted value of projected CF up to contract boundary
  o Calced on policy-by-policy basis
  o Projections must allow for all expected decrements and ph actions, incl. lapses
• Using best estimate with no margins for prudence
• Must account for internal and external data when set assumptions best reflecting characteristics of underlying portfolio
• Can allow for future management actions(e.g. premium/charge reviews) that insurer can reasonably expect to implement
• Financial guarantees and options may need appropriate market-consistent approach e.g. stochastic analysis

Question 7

What are the requirements for the future management actions that can be allowed for in SAM?

Answer 7

 Appropriately allow for expected ph behaviour
 Account for time taken to implement
 Realistic and consistent with current business practice and strategy unless there’s sufficient current evidence of future changes in practice
 Consistent with PPFM

Question 8

What is the Risk-Free Rate (RFR)?

Answer 8

RFR is the risk-free discount rate, generally the government bond curve.

Question 9

Where do insurer’s get the RFR used in SAM discounting?

Answer 9

• Generally govt bond curve given by PA
• If matching L with swap based assets&raquo_space; can use swap curve adj for liquidity and credit risk
• Life annuity policies meeting certain criteria can add illiquidity premium

Question 10

What must best estimate assumptions be based on?

Answer 10

Best estimate assumptions must be based on past experience and modified by knowledge or expectations of the future.

Question 11

What should be included in mortality and morbidity assumptions?

Answer 11

Mortality and morbidity assumptions should be based on past experience and modified for expected future changes.

Question 12

What does APN 105 outline?

Answer 12

APN 105 outlines steps to follow and minimum requirements for models used to derive projected HIV prevalence and extra AIDS mortality.

Question 13

What is the expectation regarding tax effects on future investment returns?

Answer 13

Tax effects on expected future investment returns must be considered separately for each tax fund.

Question 14

What do policyholders of market-related policies expect?

Answer 14

Policyholders expect to participate in unsmoothed investment performance of the underlying asset portfolio.

Question 15

What does the TCF guidelines state about policyholder expectations?

Answer 15

Policyholders expect all contractual benefits to be paid and obligations met.

Question 16

What must insurers account for when deciding on future surplus distributions?

Answer 16

Insurers must account for expectations that should influence decisions on future surplus distributions and premium reviews.

Question 17

What does APN 110 describe?

Answer 17

APN 110 describes minimum steps that must be taken when setting up a reserve.

Question 18

What must be assumed about future bonuses in discretionary participation policies?

Answer 18

Full maintenance of bonus rates that may reasonably be expected should be assumed.

Question 19

What is the Risk Margin?

Answer 19

It represents:
1. The premium over and above the BEL that an insurer would require to take on another insurer’s obligations.
2. Theoretical compensation for the risk of future experience being being worse than that assumed in the BEL calculation and the cost of having to hold that risk.

Question 20

Define the Cost of Capital?

Answer 20

o Frictional cost of company locking SCR and being unable to freely use it
o Cost of providing amount of eligible own funds = SCR (net hedgeable risks) necessary to support insurance obligations over lifetime, assuming business transferred to 3rd party

Question 21

Why is the SCR net of hedgeable risks?

Answer 21

o 3rd party generally won’t pay premium for hedgeable risk since can be removed

Question 22

What is the prescribed RM under SAM

Answer 22

o Prescribed as 6% from SII-
o i.e., RM = 6% projected non-hedgeable SCR at each future year, discounted using risk free rates

Question 23

How is the RM calculated?

Answer 23

o Project non-hedgeable SCR- can use simplifications subject to proportionality and materiality
o Must do calc for each business line
o Can allow for diversification benefits
 Aka first calc RM for all lines together then allocated to underlying lines of business
o RM = 6% projected non-hedgeable SCR at each future year, discounted using risk free rates