Supervisory Reserves (23 – 24)

Question 1

Reserves purpose

Answer 1

1. Demonstrate solvency
2. Investigate realistic company position

Question 2

Mechanics of reserve calculation

Answer 2

1. gross premium valuation
2. net premium valuation

Question 3

Gross premium valuation method

Answer 3

Reserve
= PV benefit outgo
+ PV expenses
– PV expenses

Question 4

Bases for gross prem

Answer 4

1. prudential
2. best estimate
3. best est. & zeroise CF

Question 5

Net premium valuation

Answer 5

EPV future benefit outgo
– EPV future NET premiums

Question 6

Net premium method

Answer 6

– simple
– implicit allowance for future expenses and bonuses
– inappropriate for single premium
– mainly conventional with-profits

Question 7

Gross premium method

Answer 7

– explicit allowance for expenses & future bonuses
– office premiums
– immediate profit taken (price & valuation basis)

Question 8

Regulations on negative reserves

Answer 8

– sum of unit & non-unit ≮ 0

– future profits need to emerge in future to repay negative reserves

– no future valuation strain

– aggregate not negative

Question 9

Market consistent valuation

Answer 9

The value at which A/L could be exchanged
– in a sufficiently deep and liquid market,
– between knowledgeable and willing parties
– at an arm’s length

Question 10

Liability valuation

Answer 10

1. market consistent / fair valuation
   > discounted CF
   > replicating portfolio (MTM)

Question 11

Valuation types

Answer 11

Active
– MTM / Risk based capital

Passive
– Net premium valuation / historic cost / book value / amortised cost