Provisions

Question 1

Reasons for calculating provisions

Answer 1

• determining the value of liabilities for published accounts
• demonstrating supervisory solvency
• determining the value of liabilities for internal management accounts
• valuing the provider for merger or acquisition (or transferring liabilities)
• determining whether discretionary benefits can be awarded
• setting future contribution levels for a benefit scheme
• valuing benefit improvements for a pension scheme
• calculating discontinuance benefits
• influencing investment strategy
• providing disclosure information to beneficiaries
• to provide for expected credit losses for a bank

Question 2

Purpose of global provision

Answer 2

Global provisions looks that the provider’s liabilities in aggregate

• act as additional protection against insolvency

• cover risks, both financial and non-financial, that cannot necessarily be attributed to individual contracts

• reflect the degree of mismatching of assets and liabilities

Question 3

Different bases

Answer 3

The bases in order of increasing strength are: optimistic, best estimate and cautious

Question 4

What strength of basis depends on

Answer 4

• the reason for (or purpose of) the valuation

• the needs of the client

• regulation and legislation

Question 5

Setting assumptions with regards to purpose

Answer 5

• published accounts - the assumptions will reflect legislation and accounting principles. Matters to be considered include:
- using a going concern or break-up basis
- reflecting a true and fair view
- whether best estimate or prudent

• supervisory solvency - need to consider the degree of prudence and any prescribed methods/assumptions to be followed, or whether left to actuarial judgement with a disclosure requirement

• internal accounts - a best estimate basis is typically used

• liability transfers - a best estimate basis might be used to calculate the value of liabilities to be transferred so as to achieve fairness for all parties and to achieve agreement between actuaries acting for different parties. However, a different basis might be used:
- due to a power imbalance between the parties involved
- because of a stronger desire to proceed by one party
- to recognize the need to hold margins to protect security

• determining whether discretionary benefits can be awarded - likely to err on the side of caution so that surplus is not over-stated

• setting contribution levels - the assumptions used will depend on the objectives of the parties concerned and on the structure of the membership

• calculating discontinuance benefits - a best estimate basis may be considered to be fair but other bases may be appropriate

• setting investment strategy - a realistic set of assumptions is typically used, with sensitivity and scenario testing. A stochastic approach can add significant value

• disclosure information for beneficiaries - the assumptions will reflect legislation, but a realistic basis will typically be used, with a range of results also provided