Ch 22: Assumptions 2 Flashcards
Summary card
- Essentially cover the different purposes for which we need to set assumption basis
- Published results
- Internal management accounts
- Embedded value
- Appraisal value
In the first chapter on setting assumptions, we considered setting assumptions for pricing.
What other exercises may we construct basis for? (4)
- Published results
- Supervisory reserves
- Internal management accounts
- Embedded values
Valuing liabilities: overview
Broadly speaking, how do we value the liabilities of a life insurer? (4)
- Broadly speaking, determined as PV of
- Future benefit outgo
- plus claims expenses (including commission)
- plus taxes (if appropriate)
- less premums
Valuing liabilities: overview
What impact do margins have on prudence on the calculation of liabilities? (1)
- Greater the margins assumed => more prudent the calculation of liabiltiies
Valuing liabilities: overview
What implication does increasing/decreasing the RDR have on calculation of liabilities? (3)
- Impact of changes in the RDR
- all things being equal,
- decreasng (increasing) the RDR, will increase (decrease) degree of prudence for a positive reserve
- decreasng (increasing) the RDR, will decrease (increase) degree of prudence for a negative reserve, where this is permitted
Valuing liabilities: Published accounts, key considerations
State the factors to consider when deciding assumptions for determining the value of liabilities to show in an insurance company’s published accounts (6)
- For country concerned, consider
- legislation
- accounting principles
- Matters to consider
- going concern or break-up basis
- required to show a true and fair value?
- best estimate basis or some other basis?
- precisely how terms used are to be interpreted
Valuing liabilities: Internal management accounts, key considerations
State key driver that should determine the pricniples to be followed for determining the value of liabilities for internal management accounts (1)
State the most likely aim of such a valuation. (1)
- Key driver should be discussion with insurance company about the principles to follow, based on the purpose for which the internal accounts are required
- Most likely aim is to have best estimates of the company’s financial performance, based on realistic assumptions.
Valuing liabilities: Supervisory reserves, key considerations
How might rules governing the solvency supervision process relate to rules for published accounts? (1)
Key considerations for supervisory reserves (4)
- If separate accounts required during process solvency supervision process , rules for preparation of separate accounts may/may not be same as rules for published accounts…
- Key considerations
- for example may be required to use different basis (going-concern/break-up basis)
- Should reference rules & guidance which was issued needing interpretation
- will most likely be certain assumption restrictions which are either
- specific (valuation interest rates must equal premium basis rate)
- general (do valuation as wish, subject to not lower than X basis)
- usually require prudent basis, some jurisdictions moved to market consistent approach
Valuing liabilities: going-concern vs break up basis
- going concern
- assume insurer continues issuing new bussiness into future
- break-up
- assume new business cease immediately, or at some point in future e.g
- …closed fund by company, or..
- …transfer liabilities to another insurer, who will administer/procress claims until book runs down
Reserving basis vs pricing basis: uncertainty in assumptions
What’s a key difference between setting assumptions for pricing vs reserving in terms of information available? (1)
Key difference is that in force policies can provide important information for setting reserving assumptions (compared to pricing assumptions)
Reserving basis vs pricing basis: uncertainty in assumptions
What kind of useful info can in force policies provide for setting assumptions?
(1,3)
(1,5)
In force policies can help with following
- Demographic assumptions
- already know who PHs are => good info about class of lives
- historical experience investigation likely to indicate future experience well (if data volume credible)
- hence less uncertainty in assumption than for pricing
- Expense assumptions
- should be easier to assess for reserving because
- no future initial expenses
- less uncertainty over volume/mix of future business
- but share of fixed expenses covered by existhing PHs affected by new policies expected…
- …so expense assumption still has some uncertainty
- should be easier to assess for reserving because
Reserving basis vs pricing basis: using pricing assumptions for supervisory purposes
What is relationship between pricing and reserving assumptions in some countries? (1)
- In some countries, standard practice uses prudent assumptions for pricing/premiums, then same assumptionsf or supervisory reserving
Reserving basis vs pricing basis: using pricing assumptions for supervisory purposes
What is impact on WP products of using pricing assumptions prudent enough to also be used for reserving? (1)
- For WP products, surplus will emerge from actual experience being better than that assumed in prudent assumptions ie. even if margins are high, surplusses from experience can be given back to PHs through bonuses
Reserving basis vs pricing basis: using pricing assumptions for supervisory purposes
Why would prudent pricing basis strong enough for supervisory purposes be problematic for without profits business? (1)
- Less appropriate for without-profits products as overly high margins => uncompetitive, hence usually small margins are used, meaning pricing basis cannot be used for supervisory solvency
Reserving basis vs pricing basis: using pricing assumptions for supervisory purposes
How appropriate is pricing basis for supervisory purposes if expected experience is used? (2)
- Sometimes use expected experience for pricing, with risk allowed for through RDR.
- Inappropriate for supervisory reserving if reserves need prudent calc, since RDR has to be investment return assumption (risk free rate, if market consistent) and RDR is measure of return required by shareholders on their capital (hence irrelevant to reserve calculation, since unrelated to investment return assumption