Chapter 23 - Supervisory reserves and capital requirements (1) Flashcards
What are the purposes of reserves
IS ALIVE
- to determine the liabilities to be shown in INTERNAL management accounts
- if SEPARATE accounts have to be prepared for the purpose of supervision of solvency, to determine the liabilities to be shown in those supervisory accounts
- to ASSIST with the assessment of reinsurance arrangements
- to determine the LIABILITIES to be shown in the insurer’s published accounts
- to influence the INVESTMENT strategy
- to VALUE the insurer for merger and acquisition
- to ESTIMATE the cost of claims incurred in recent periods and hence provide a base
for estimating the future premiums required to attain a given level of profitability
What are the uses of investigating the realistic / “true” position of the company
- To help demonstrate the long-term sustainability of profit distribution rates (such as bonuses) and hence to help determine current bonus declarations
- To help determine the realistic profitability of the company for the information of shareholders (etc) and management
- To assist in the general financial management of a life company
What are the two primary reserving methods
- Gross premium valuation
- Net premium valuation
Define Gross premium valuation method and what is its formula
This method is for placing a value on a life insurance company’s liabilities that explicitly values the future office premiums payable, expenses and claims, with the latter possibly including future discretionary benefits
Sum Assured + Renewal expenses - Office premiums
Define unit reserves
It is part of the reserve that a life insurance company needs to set up in respect of its unitised contracts. The unit reserve represents its liability in terms of the units held under the contracts
How would you calculate the unit reserve for a unit-linked policy
It is the number of units multiplied by their bid value
How would you calculate the non-unit reserve
It is the PV of the excess of non-unit outgo (eg expenses, benefits in excess of the unit fund) over non-unit income (eg charges, unallocated premiums).
What may regulations specify in terms of the non-unit reserves held?
- The sum of the unit and non-unit reserve for a policy should not be less than any guaranteed surrender value
- The future profits arising on the policy with the negative non-unit reserve need to emerge in time repay the ‘loan’
- In aggregate, the sum of all non-unit reserves should not be negative
What are the salient features of the gross premium method
- An explicit allowance is made for expenses
- An explicit allowance can be made for vested and expected future bonuses
- The future premiums valued are the actual (‘Office’) premiums expected
- Any difference between the pricing and valuation basis will immediately be taken as profit or loss
- Reserves may initially be negative for non-linked business, partly due to initial expenses and partly due to capitalising the expected future profit
- The reserves tend to be quite sensitive to changes in basis
How is the net premium valuation method calculated
It is calculated as the Present value of expected future benefit outgo less the Present value of future net premiums
The present values are calculated on the basis of interest and mortality only. There is no explicit allowance for expenses.
What are the features of the net premium valuation method
- It is simple
- It makes no explicit allowance for future bonuses
- It makes no explicit allowance for future expenses
- For regular premium business, the reserves are relatively insensitive to changes in the valuation basis (relative to gross premium method)
