Ch22: Setting assumptions (2)

Question 1

Considerations when setting assumptions for published accounts

Answer 1

• whether the accounts are to be prepared on a going concern basis or a break-up basis
• whether the accounts are required to show a true and fair value
• whether reserves are required to be assessed as best estimates or on some other basis

Question 2

Uncertainty in assumptions: pricing vs reserving

Answer 2

• parameter uncertainty for demographic assumptions should be less for reserving since we know who the policyholders are
• expense assumptions should be easier to access because there are no future initial expenses to be incurred and partly because there is much less uncertainty over the volume and mix of the existing business in the future

Question 3

EV

Answer 3

Present value of future shareholder profits in respect of the existing business of a company, including the release of shareholder-owned net assets

Question 4

EV is the sum of

Answer 4

• shareholder-owned share of net assets (assets in excess of reserve). either valued at MV or discounted to reflect lock-in value if they have to be held within the fund
• the present value of future shareholder profits arising from existing business

Question 5

Appraisal value

Answer 5

• sum of EV and goodwill

Question 6

EV basis

Answer 6

Need two different bases
- reserving basis (to calculate net asset now and reserves in the PV of future shareholder profit)
- projection basis (PV of future shareholder profit)

Question 7

Difference between best estimate valuation and EV

Answer 7

• best estimate valuation gives a measure of policyholder’s benefit security
• best estimate valuation considers the present value of each policy under realistic assumptions. Total compared to asset value to give realistic measure of solvency
• EV considers cashflows across the portfolio in each time period rather than the PV of cashflow for each policy
• Focus is shareholder profit
• EV takes into account cost of capital

Question 8

The basis for a valuation should reflect

Answer 8

• expected future experience
• margins to ensure adequacy of reserves
• legislation/regulation
• the need for consistency