T_Reserving and Investment

Question 1

Features of NPV

Answer 1

Simple
No explicit allowance for expenses or future bonuses
Reserves insensitive to changes in basis for regular premium

Question 2

Principles of setting reserves

Answer 2

Amount should be sufficient to ensure all future liabilities can be met
Calculated by prudent valuation of all future liabilities on existing business and include:

Guaranteed benefits (including SV’s)
Bonuses already guaranteed (vested and non-vested)
Future Bonuses
Policyholder Options
Non-unit cash flows on unit-linked policies
Expenses and Commission
Premiums
Prudent = including margins for adverse experience

Question 3

Principles of setting reserves cont.

Answer 3

Take into account nature, term and valuation method of assets
Appropriate approximations are allowed
Assumptions chosen prudently, having regard to past and expected experience
Lower interest rate where no explicit allowance for future bonuses
Method should recognise profits in appropriate way over term
Valuation method should be disclosed

Question 4

Unusual Values and Spot Checks

Answer 4

Large or zero values
Impossible Dates
Distribution of values

Question 5

Analysis of Surplus and Analysis of Embedded Value in order to ascertain

Answer 5

Discrepancy to previous years

Discrepancy to experience investigations

Question 6

Data Consistency

Answer 6

Average Sum Assured and Premium
Sum Assured/Premium
Cash flows vs Revenue Account

Question 7

Data Reconciliation

Answer 7

Opening + Movements = Closing
Policies
Benefits and Bonuses
Premiums
# of Units

Question 8

Principles of Investment

Answer 8

Appropriate to nature, term and currency of liabilities
Maximise overall return
Investment freedom depends on level of free assets and regulatory requirements

Question 9

Asset-liability matching requirements

Answer 9

Nature, term and currency of liabilities
Nature
Guaranteed in money terms
Guaranteed in terms of price index
Discretionary
Investment lined

Term
Discounted mean term

Currency
Match currency to reduce currency risk

Question 10

Investment Strategy Considerations

Answer 10

1) Split liabilities into categories (e.g. Guaranteed, discretionary, etc)
2) Match investment-linked liabilities exactly
3) Match liabilities guaranteed with reference to an index or choose suitable alternative
4) Match liabilities guaranteed in monetary terms with government bonds (or corporate bonds) of suitable term
5) Back discretionary liabilities with equity to property, subject to availability and PRE
6) Invest excess assets in high yielding assets (equity or property)
7) Tailor strategy to include enough cash to provide day to day liquidity