QA Bank Part 8 Flashcards
Define provisions
Provisions are
… the calculated AMOUNTS
… that need to be SET ASIDE
… to meet a provider’s future LIABILITIES.
10 Reasons for calculating provisions
- to determine the liabilities to be shown in the provider’s published accounts and reports
- if separate accounts and reports have to be prepared for the purpose of supervision of solvency, to determine the liabilities to be shown in those accounts.
- to determine the liabilities to be shown in internal management accounts and reports of the provider
- to value the provider for merger or acquisition
- to determine the excess of assets over liabilities and whether any discretionary benefits can be awarded
- to set future contributions to a benefits scheme
- to calculate discontinuance / surrender benefits
- to influence investment strategy
- to value benefit improvements for a benefits scheme
- to provide disclosure information for beneficiaries.
7 Factors that will influence the choice of valuation method and assumptions when determining the value of an insurer’s liabilities
Factors include:
A - any legislation or ACCOUNTING principles that may apply
- whether the valuation assumes a going concern or a break-up BASIS
D - the quality and quantity of the DATA used
O - whether guarantees or OPTIONS are being valued
P - the PURPOSE of the valuation (supervisory provisions, internal accounts, published accounts)
T - the TYPE of business being considered and its risk characteristics
S - the size of the SOLVENCY capital
7 Reasons why a general insurance company may make a loss while writing profitable business
C - deterioration in CLAIMS experience of previous years’ business
R - REINSURER default / failure
A - ASSET values fall
P - PROVISIONS too cautious
F - FRAUD
F - regulatory FINES
L - change in LEGISLATION or TAX
6 Sources of surplus / deficit in GENERAL INSURANCE:
- divergence from valuation assumptions
- change in valuation method
- change in valuation basis
- policy changes
- changes in legislation
- surplus carried forward from previous valuation
Sources of surplus / deficit in GENERAL INSURANCE include divergence from valuation assumptions of…. (12)
- claim RATES
- claim AMOUNTS
- claim INFLATION
- INVESTMENT return
C - COMMISSION
L - LAPSE rates
E - EXPENSES && expense INFLATION
V - VOLUMES of business && MIX of business
E - ENDORSEMENTS
R - proportion of policyholders who RENEW
6 KEY sources of surplus / deficit expected from LIFE INSURER
Key source include divergence from valuation assumptions of:
- investment return
- mortality
- expenses including commission
- withdrawal rate
- new business volumes and mix
A provider will want to analyse the surplus arising over a time period, in order to:
- show the financial effect of divergences between the valuation assumptions and the actual experience, exposing 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, thus 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.
Principles underlying pension benefit projections
- show the likely level of pension benefits that could be provided
- show the likely level of the fund at retirement
- show the return the individual is likely to obtain on contributions
- show the effect of charges on the likely return
- take account of individual circumstances
Individual circumstances to account for in pension projections (5)
- age
- gender
- marital status
- level of earnings and contributions
- expected retirement age
Pension projections should aim to… (4)
- be simple to understand
- be transparent
- enable comparisons to be made by the member between providers
- not be misleading
The risk of insolvency can be reduced by implementing systems that … (3)
- maximise the value of assets
- minimise the value of liabilities
- give stability to the relative value of assets to liabilities
How would we increase the value of assets to ensure solvency? (3)
- choosing an optimal investment strategy that maximises return, subject to an acceptable degree of risk.
- holding assets that have maximum value in the solvency test, (eg only assets that are admissible)
- raising fresh capital (eg through a rights issue or a capital injection from a parent company)
How would we reduce the value of liabilities to ensure solvency? (3)
The insurer will want to look at its exposure to unusual and significant claim events that could jeopardise its solvency.
IT might:
- write less classes where experience is very uncertain and hence particularly conservative reserves have to be held
- restrict exposure to certain perils, through exclusions or upper limits on payouts
- purchase appropriate types and levels of reinsurance cover, eg excess of loss.
- use a weaker basis for valuing liabilities
- tighter operational risk management
How could the value of liabilities be reduced through tighter operational risk management? (3)
More stringent:
- underwriting
- expense control
- fraud management
