Part 8 Flashcards

1
Q

Factors to consider when setting discontinuance terms

A
  • Contracts for which to offer discontinuance terms
  • Forms of discontinuance terms offered
  • Asset share
  • Policyholders’ reasonable expectations
  • Competitive considerations
  • Treating customers fairly
  • New business disclosure
  • Ease of calculation
  • Cost of implementing the discontinuance terms
  • Frequency of change of discontinuance terms
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2
Q

Factors affecting the strength of the basis

A
  • The reason for the valuation
  • The needs of the client
  • Regulation
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3
Q

Reasons for calculating provisions needed by a provider include the following:

A
  • To determine the liabilities to be shown in the providers published accounts and reports
  • Demonstrating supervisory solvency
  • To determine the liabilities to be shown in internal management accounts
  • To value the provider for merger or acquisition
  • To determine whether any discretionary benefits can be awarded
  • To set future contributions to a benefit scheme
  • To value benefit improvements for a benefit scheme
  • To calculate discontinuance/ surrender benefits
  • To provide disclosure information to beneficiaries
  • To influence investment strategy
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4
Q

Main concepts that have been widely used in relation to the periodic financial accounts of all businesses:

A
  • The “going concern” concept: the enterprise will continue in operational existence for the foreseeable future
  • The “accruals” concept: revenue and costs are recognized as they are earned or incurred, not as money is received or paid
  • The “consistency” concept: there is consistency of accounting treatment of like items within each accounting period and from one period to the next
  • The concept of “prudence”: revenue and profits are not anticipated, and provision is made for all known liabilities, whether the amount of these is known with certainty or is a best estimate in light of the information available
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5
Q

In analysing accounts, attention should be paid to

A
  • Any accounting rules, guidance and practices in the country concerned
  • Whether accounts should be prepared on a going concern basis and should give a true and fair value
  • Any changes in accounting practice
  • Basis used for valuation of assets
  • Any exceptional events during the accounting period
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6
Q

Ratios to be considered to get an indication of the strength of reserves:

A
  • Incurred expenses to premium income
  • Commission to premium income
  • Operating ratio
  • Outward reinsurance premium income to gross premium income
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7
Q

Disclosure to beneficiaries of benefit schemes could include details on

A
  • Benefit entitlements
  • Contribution obligations
  • Expense charges
  • Investment strategy
  • Risks involved
  • Treatment of entitlements in the event of insolvency
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8
Q

Common aims that most accounting standards attempt to achieve:

A
  • Recognizing the realistic costs of accruing benefits
  • Avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
  • Consistency in the accounting treatment from year to year (although not necessarily from company to company)
  • Disclosure of appropriate information
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9
Q

Differences that exist relate to the:

A
  • Emphasis on the relative importance of the balance sheet and the income statements in demonstrating a true financial picture
  • Choice of actuarial methodology
  • Flexibility in the setting of assumptions
  • Smoothing of year on year fluctuations
  • Amount of information to be disclosed
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10
Q

Possible disclosure requirements that may be needed include the:

A
  • Assumptions used
  • Actuarial method used
  • Value of liabilities accruing over the year
  • Increase in the past service liabilities over the year
  • Investment return achieved on the assets over the year
  • Surplus/deficit
  • Change in the surplus/deficit over the year
  • Benefit cost over the year in respect of any director
  • Membership movements
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11
Q

A provider will want to analyse the surplus arising over a year or longer period of time in order to:

A
  • Show the financial effect of divergences between the valuation assumptions and the actual experience
  • Determine the assumptions that are the most financially significant
  • Show the financial effect of writing new business
  • Validate the calculations and assumptions used
  • Provide a check on the valuation data and process, if carried out independently
  • Identify non-recurring components of surplus, then enabling appropriate decisions to be made about the distribution of surplus
  • Reconcile the values for successive years
  • Provide management information
  • Provide data for use in executive remuneration schemes
  • Provide detailed information for publication in the provider’s accounts
  • Demonstrate that the variance in the financial effect of the individual levers is a complete description of the variance in the total financial effect
  • Give information on trends in the experience of the provider to feed back into the actuarial control cycle
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12
Q

Apply - Actual and expected revenue accounts can be compared to answer questions such as:

A
  • Has the provider earned more by the way of investment than it expected to earn when it designed the product?
  • Has the provider spent more than it allowed to be spent in the design of the product?
  • Have termination rates (death, lapse, surrender claim etc) followed expectations?
  • Has inflation (and hence expenses and index-linked claim costs) been higher than expected?
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13
Q

Sources of surplus include:

A
  • Mortality
  • Morbidity
  • Withdrawal/lapses
  • New business levels
  • Premium/contribution paid
  • Investment income and gains
  • Claim amounts
  • Expenses
  • Commission
  • Salary growth
  • Inflation
  • Taxation
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14
Q

Apply – in order to control costs of payments and expenses, management can try to:

A

• Reduce the likelihood of claims through:
o Periodically reviewing ongoing claims
o Good underwriting of new business
o Good underwriting at claim stage
o Providing customer incentives not to claim
• Reduce claims/benefit amounts by: (variability)
o Using reinsurance to limit the volatility of claims or to protect from the risk of large claims
o Reducing future benefit payments
o Keeping guaranteed benefits to a minimum
o Introducing/ increasing excesses
• Control expenses by:
o Periodically reviewing expenses
o Keeping charges/ premiums flexible
o Ensure that claims expenses are commensurate with the claim size
• Increase the number of policies that renew at the renewal date and/or reduce the number of contracts that lapse
• Follow an investment policy that increases investment returns (subject to an acceptable level of risk)
• Adopt an effective tax management policy

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15
Q

The factors that will affect the amount of surplus distributed by a life insurance company are:

A
  • Provision of capital
  • Margins for future adverse experience
  • Business objectives of the company and retention of margins
  • Policyholder expectations
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