Chapter 32: Provisions

Question 1

Why insurance companies need a claims reserve:

PASET

Answer 1

Public accounts of the company should demonstrate this benefit
Accruals principle of accounting
Statutory solvency position of company (Liability to company and needs to be quantified)
Ensures company can meet all future liabilities
Time delays (claim made and reported, reported an settled)

Question 2

Reasons for calculating provisions : 
Need for Individual – for each contract/product
BAD MEDICS
Need for global provision
CARD

Answer 2

Benefit improvements/contribution reductions for a benefit scheme
Accounts and reports (to show liabilities in them) published accounts, internal management
Discontinuance and surrender benefit
Merger and Acquisition value
Excess of assets over liabilities possible discretionary benefits
Disclosure information provided to beneficiaries
Investment strategy
Contributions and premium level setting
Statutory requirement- demonstrating supervisory solvency

Cover financial and non-financial risks - provisions in excess already held
Additional protection against insolvency
Reflect degree of A-L-mismatch
Demonstrate unambiguous solvency

Question 3

Ways to counter anti-selection:

MESSG

Answer 3

Modify assumptions used 
Eligibility criteria 
Set terms that favour one option over another 
Stricter underwriting
Group cover eliminates anti selection

Question 4

Factors affecting the strength of basis used:

PRM

Answer 4

Purpose of the valuation
Regulation and legislation
Management discretion

Question 5

Factors influencing the choice of valuation method and assumptions when determining the value of insurers liabilities
PuLSGRiDBNS

Answer 5

Purpose of the valuation DID PISC
Legislation/regulation or accounting principles
Size of solvency capital - larger solvency capital the less significant the margins in the individual provisions
Guarantees or options being valued - tend to use more cautious basis
Risk characteristics of business being considered
Data used - quality and quantity
Going concern vs breakup basis
Needs of the client - Individual, Shareholder, Investment
Sensitivity testing

Question 6

Purposes and the basis used

DiD PISC / DARIS DIP

Answer 6

Discontinuance basis - Best estimate
Discretionary benefits - Cautious

Published accounts- Depends, usually best estimate as it will need to reflect the most realistic view of the company
Internal accounts - Best estimate
Setting investment strategy - Best estimate basis
Contribution level- depends on the objectives and the structure

Discretionary benefits - cautious, smooth benefit provision
Acquisition/Merger - best estimate/Bargaining power
Reporting and accounting - best estimate, real view
Investment strategy set - Realistic, sensitivity and stochastic testing
Statutory solvency - Prudent, demonstrate financial strength

Discontinuance benefits - best estimate, fair
Internal reporting and decision making
Pricing and contribution rates