Useful to know

Question 1

Outline the FSI’s

Answer 1

FSI 1: Framework for financial soundness of insurers

FSI 2: Valuation of assets, liabilities and EOF

FSI 2.1: Valuation of assets and liabilities, other than the TP

FSI 2.2: Valuation of the TPs

FSI 2.3: Determination of the EOF

FSI 3: Calculation of MCR

FSI 4: Calculation of SCR using the standard formula

FSI 4.1-4.4: Market risk, life underwriting, non-life underwriting; operational risk capital requirement

FSI 5: Calculation of SCR using full or partial internal model

FSI 6: Liquidity risk assessment

GN on FSI 2.2: Valuation of TPs

Question 2

Define contract boundaries

Answer 2

Contract boundary:
• BEL up to the contract boundary only
• Contract boundary: date at with the insurer has the unilateral right to:
○ terminate the contract
○ reject the premiums payable under the contract
○ amend the premiums or benefits payable under the contract at a future date in such a way that the premiums fully reflect the risks (i.e. premium reviews)
• For very short contracts (<90 days) can set the boundary to zero

Question 3

EV Cost of Required Capital Considerations (When using SAM SCR)

Answer 3

The cost of required capital is the difference between the amount of required capital and the present value of future releases of this capital, allowing for future net of tax investment returns expected to be earned on this capital.

In some cases there are similarities between the SAM risk margin and the EV Cost of Requirement Capital concepts but there may
also be some important differences. Thus, where companies want to base the Cost of Required Capital on the SAM risk margin the actuary needs to consider whether:
• The risk margin is a suitable measure of the Cost of Required Capital from a
shareholder perspective and adjust appropriately
•The SAM cost of capital rate is appropriate and if not, determine an appropriate
rate;
•Appropriate allowance for any changes made to the contract boundary
•Comfortable with the allowance for the frictional cost of capital in the RM

Question 4

SAP104 Compulsory Margins

Answer 4

Mortality 7.5%
Medex/Medical 15%
Morbidity 10%
Terminations for CIP 10%
Expenses 10%
Expense inflation 10%
Lapses 25%
Surrender 10%
Investment return management charges 25bps

Question 5

Key differences between SAP104 and SAM valuing of liabilities (4)

Answer 5

-Definition of contract boundaries
-Discount rate used i.e. SAM risk-free vs SAP104 real-world approach
-For SAM, no margins used. No need to zeroise negative liabilities. For SAP104, Use of margins (CMs and DMs). SAM BEL lower than SAP104
-Voluntary premium increase options: For SAP104: Exclude where it results in a reduction of policyholder liabilities. For SAM, BE’s must reflect the assumption