Methods and bases for liability valuation Flashcards
What are the main assumptions that are required?
- Mortality
- Withdrawals
- Discount rate
- Unit growth rate
- Inflation
- Expenses
- Tax
What is the main difference between assumptions used in peak 1 and 2?
Prudent/not
What is prudent in mortality?
If contract pay benefits on death, high rate
If contract pays nothing on death, no deaths are worse
How to calculated the peak 1 discount rate?
Use return expected from assets backing contracts
If with-profits, reduce it to allow for bonuses (higher liabs)
Reduce for tax if necessary (higher liabs)
Take into account PRA max limits (big = lower liabs)
How to calculate peak 2 discount rate?
Base on market yield curve
How do we calculate the unit growth rate? What is prudent?
Avg. return on asset mix which unit linked contract invested
Lower is more prudent as charges come from unit value (low unit value = less charges = less profit)
No maximum on rate
How do we calculate inflation rate?
Should be consistent with discount and unit growth rate
Usually discount/unit growth - expense inflation <=2%pa.
What 2 ways are there to calculate expense assumption? How does each allow for the expenses?
Gross (include explicit expenses and expense inflation) or net premium valuation (difference between office and net premiums enough for expenses)
What checks do we need to do on expenses and what future even should we allow for?
- Check total of per policy expenses vs. expected aggregate expenses
- Allow for possible closing to NB in future and any possible increase in expenses
How do we calculate the tax assumption to be used?
- BLAGAB - disc rate/unit growth/expense assumption need to account for the BLAGAB fund tax rate
- OLTB tax to beignored in individual policy calcs (only SHT)
- For unrealised investment gains on assets in unit-linked business, tax liability may be reserved for and unit price adjusted but doesn’t have to be
What global reserves may be used?
AIDS Mismatch reserve future tax on unrealised gains data errors or accuracy doubts risk of reinsurer credit default closing to nb possibility expenses
How do u check you’ve high enough reserves for a policy with a cash option
Reserve must be able to meet any guaranteed amount within 12 months from valuation date
Future projections show able to meet cash amount at any future possible exercise
Where are transfers out of the long-term insurance form shown in the returns? When must a company notify regulator about distribution of surplus to shareholders?
Form 58
Notifiy if the transfer is more than 0.5% higher than last valuation
Regulator can stop it if not TCF
What is the UK surplus distribution system?
Bonus declaration system
Who can be a realistic life basis firm?
Must be if over 500m
Can choose to be if under 500m liabs
