Chapter 14 - Assumptions - General Considerations

Question 1

General considerations when setting assumptions: (8)

Answer 1

1. Consider use to which assumptions will be put
2. Take particular care over choice of the assumptions that will have the most finacial significance
3. Achieve consistency between various assumptions
4. Consider any legislative or regulatory constraints
5. Consider needs of client
6. Ensure that parameters derived from data are produced as accurately from the data
7. Ensure that data used to derive these assumptions are relevant to the insured lives
8. Ensure that the bases used are flexible to reflect changing risk circumstances

Question 2

When using a CF model, risk to company of adverse future experience may be allowed for through: (3)

Answer 2

1. Assessing what margins to apply to the expected values
2. Using a stochastic approach
3. The risk element of the risk discount rate

Question 3

Margins incorporated in the price actually charged will depend on these factors: (5)

Answer 3

1. Competitive nature of the market
2. Company’s unique selling proposition (USP)
3. Company’s attitude to risk
4. Credibility, accuracy, relevance and ‘up-to-dateness’ of the data
5. Size of the Company’s free assets

Question 4

Published valuations tend to be carried out for 2 distinct purposes:

Answer 4

1. For reporting company results
2. For supervisory purposes

Question 5

What does ‘embedded value’ measure?

Answer 5

The profitability of existing business

Question 6

What is measured by the appraisal value?

Answer 6

Value of the business as a whole, both existing business and future new business

Question 7

What is embedded value?

Answer 7

It is the PV of future Shareholder profits on respect of existing business of a company, incuding the release of shareholder owned net assets

Question 8

Examples of situations in which Embedded Value is calculated:

Answer 8

• to establish a value of the business, possibly for internal management accounts or information
• to include in published financial statements
• to assess the major part of an appraisal value for sale or purchase
• to assess growth in EV for the payment of bonusses to staff or salespeople

Question 9

What is embedded value financing?

Answer 9

Type of financial reinsurance under which a reinsurer advances a loan (often expressed as commission) to an insurer, in return for stream of future surpluses that will emerge from business in force, reflecting any prudence in valuation basis

Question 10

EV can be calculated as the sum of these 2 components:

Answer 10

1. Shareholder owned share of net assets (excess of assets held over those required to meet liabilities)
2. Present value of future shareholder profits arising on existing business