Profit/Value Reporting Flashcards
What accounting standards to UK listed companies use and their subsidiaries
IFRS
UKGAAP but could use IFRS
When SORP was revised, what allowance for reserves did it give?
SORP includes allowance for policies with no SV to have negative liabs
Explain what DAC is and why used?
- When policy sold, high expenses so a high loss/low profit
- When margins released, higher profit as worth more than renewal cost
- MSB accounting wants to reduce this volatility
- We reduce the effect of the initial outgo and reduce the future profits to make loss/profit more smoothed
- Asset held at start which then reduces as margins released
What is alternative to holding a DAC asset?
Explicit actuarial method to hold deferred costs as an asset
How long to hold DAC?
amortise over period which they’re expected to be recoverable from margins
When shouldn’t you hold DAC?
- If acquisition costs have been recovered
- If release of margins not expected to be enough over lifetime to cover the acquisition costs
- Uncertain receipt of future premiums/margins on prudent estimates of discontinuance
Is DAC allowed in pillar 1 assets?
It is inadmissible in Pillar 1 peak 1
Where are the rules on DAC?
Modified statutory basis of reporting MSB
What are EV techniques meant to measure, how do you find profit from EV?
Meant to measure realistic, risk-adjusted, valuation of shareholder cashflows from existing business and net assets
Find Profit by looking at change in EV plus profit transfer
Give a summary of the achieved profits method (APM)
- It’s to calculate future SHT with no allowance from profits of future sales.
- Estimate each element of future experience effecting SHT (inv ret, claims rate, lapse rate, expenses)
- Estimate future SHT if elements above increase
- Discount them to balance sheet date to give shareholder value
- APM profit is change in SHT + profit transfer over period insupervisory returns
What 2 techniques are used to control recognition of APM profit?
- Include risk margin in each of estimates of future experience
- Include risk margin in discount rate applied to future SHT
What are the 12 EEv principles?
- EV is measure of consolidated value of shareholder interest in covered business
- Covered business should be clearly identified and disclosed
- EV = free surplus allocated to covered bsuness + required capital - cost of holding required capital + PV future shareholder cashflows from in-force business (PVIF)
- Free surplus is MV of any capital/surplus allocated to the covered business at valuation date, but not required ot support it
- Required capital includes amount of assets in covered business over the liabs whose distribution to shareholders is restricted, EV allows for cost of holding required capital
- Values of cashflows from in-force covered business is PV of future shareholder cf’s projected to emerge from assets back the bsuienss
- Reduce (6) by value of financial options and gurantees including time value found by stochastic techniques
- EV only reflect in-force business
- Changes in future experience should be allowed for when sufficient evidence exists, assumptions should be actively reviews
- Economic assumptions internally consistent, and consistent with observable market data
- Future bonuses allowed for in WP business and also SHT
- Results to be at consolidated group level
What technique used to allow for risk in EV?
Market consistent
Why was MCEV come up with?
To formalise the MC approach that a lot had been taking for EV
What risk-free rule did MCEV introduce?
The reference rate should be swap curve + liquidity premium where appropriate
