C17 Setting assumptions 2

Question 1

State the factors to be considered when deciding assumptions for determining the value of liabilities to show in an insurance company’s published accounts.

Answer 1

Assumptions used for determining liabilities for published accounts should be consistent with
 legislation
 accounting principles in country concerned.

Matters to be considered include:
 going concern or break-up basis?
 required to show a true and fair view?
 best estimates or some other basis?
 precisely how terms used are to be interpreted.

Question 2

State the factors to be considered when deciding assumptions for determining the value of liabilities for supervisory solvency reserves

Answer 2

Assumptions for valuing liabilities for supervisory solvency reserves
- May or may not be the same as those that apply to the published accounts
- going concern or break-up basis?
-Follow rules and guidance issued

Question 3

State the key driver that should determine the principles to be followed for determining the value of the liabilities for internal management accounts.

State the most likely aim of such a valuation.

Answer 3

Valuing liabilities for internal management accounts

The key driver should be a discussion with the insurance company about the principles to follow, based on the purpose for which the internal accounts are required.

The most likely aim is to have best estimates of the company’s financial
performance, based on realistic assumptions.

Question 4

Define embedded value.

Answer 4

Embedded value
It is the sum of:
 shareholder-owned share of net assets, where net assets are defined as the excess of assets held over those required to meet liabilities.
 present value of future shareholder profits from existing business.

Question 5

List the components that make up the present value of future shareholder profits from existing contracts, for the following types of business:
 conventional without-profits
 unit-linked
 with-profits.

Answer 5

Present value of future profits
 Conventional without-profits business: the present value of future premiums plus investment income less claims and expenses, plus release of supervisory reserves and required solvency capital.
 Unit-linked business: the present value of future charges less expenses and benefits in excess of the unit fund, plus investment income earned on, and the release of, any supervisory non-unit reserves and required solvency capital.
 With-profits business: the present value of future shareholder transfers, for example as generated by bonus declarations.

Question 6

Define appraisal value.

Answer 6

Appraisal value
It is the sum of:
 embedded value
 goodwill, which represents an estimate of the present value of future
shareholder profits from future new business.

Question 7

State the key determinant in deciding on the basis to use for an embedded value and/or appraisal value calculation.

State the likely basis for an appraisal value that is being prepared by
(a) an insurer that is offering itself up for sale, or
(b) a purchaser of an insurer that is being offered up for sale.

Answer 7

Embedded value / appraisal value basis

The key determinant for deciding on the basis is the purpose for which the embedded value is required.

(a) An appraisal value of an insurer that is offering itself up for sale may be calculated by that insurer on realistic assumptions (without margins).
(b) The appraisal value prepared for the purchaser of an insurer may be
calculated on cautious assumptions, including margins.