SAP104

Question 1

Describe FSV methodology

Answer 1

• Best estimate assumptions with compulsory margins for prudence
• Discretionary margins could be added e.g. eliminate negative reserves
• Premiums and benefits should be those expected in terms of contract, taking into account PRE
• Liabilities must be calculated before reinsurance and value of reinsurance quantified separately.
• The premiums and benefits to be valued must be those payable in terms of the contract.
• Expected profits should not be recognised in respect of future options expected to be taken up (e.g. automatic premium increases), but expected losses in respect of such options should be recognised. Business may be grouped into broad categories with similar expected take-up rates of the options. Only the net loss in any category (if any) needs to be recognised

Question 2

Describe the best estimate assumptions

Answer 2

Best Estimate Assumptions
• Determined for relatively homogenous groups
• Expenses should be realistic, including split between initial and renewal
• An allowance for inflation consistent with interest rates
• Lapses and surrenders must be consistent with past experience adjusted for future experience
• Mortality and Morbidity based on past experience, adjusted for future trends and AIDS loading
Interest Rates
• Consistent with market securities YTM
• Consider return of matching portfolio
• Allowance for tax

Question 3

Treatment of Participating Business

Answer 3

• Should reserve for expected profit allocation to shareholders, especially where there is a defined relationship between distribution to shareholders and bonus declarations.
o Where this can act as buffer, it is only necessary to reserve for the higher of this and compulsory margins.
Liability should be increased by positive BSR (undistributed surplus earmarked for distribution)
• Liability can be decreased by negative BSR, to the extent that it can be recovered from under distribution over the next 3 years.

Question 4

Treatment of Annuities

Answer 4

Annuities
• Expected cashflows should be discounted by yields from a yield curve of backing assets, reduced for credit risk and compulsory margin. Can also be discounted at a single rate, so as to give the PV as the yield curve directly.

Question 5

Treatment of Unit Linked

Answer 5

Unit Reserve
• Can be reduced by actuarial funding
• Allowance should be made for unrealized gains tax either
• In unit price or special adjustment at valuation date
Non-Unit
• DCF using expected mortality/morbidity, expenses with inflations, cost of guarantees, adjusted for margins. Lapses withdrawals should be allowed as they impact management charge, including surrenders.
• Less expected risk charges, expense charges, management fees and guarantee charges in terms of contract.
• Any guaranteed return, will need APN110 reserve
• Non-unit negative reserves can hold to relieve financing strain, or reduced to zero as a discretionary margin