Flashcards in Car - Assumptions Reserves Deck (28):

0

## Principles of Setting Assumptions? (8)

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1 Use - Consider the use to which they'll be put

2 Focus - Take care over most financial significant ones

3 Consistency between various assumptions

4 Legs/Regs considered

5 Needs of client considered

6 Accurate - Parameters to be derived as accurately as possible from data

7 Relevant - Data should be relevant to the risks of the policies

8 Flex - Bases for valuations/reserves must be flexible to reflect changes in risk

1

## What makes up morbidity rates? (5)

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1 CI incidence rates

2 LT sickness transfer probs

3 LTCare transfer probs

4 PMI incidence rates

5 Other claim inception

2

## What makes up demographic assumptions?

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1 Mortality/Morbidity

2 Claim incidence/recovery rates

3 Lapse/Renewal Ratesetter

3

## What makes up financial assumptions? (7)

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1 Benefit sizes

2 Benefit inflation

3 Expenses

4 Expense inflation

5 Commission and clawback rates

6 Investment returns

7 Tax (profits/inv income/premiums

4

## What NB assumptions are there?

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1 Volume

2 Mix by:

Avg policy size

Product

Distribution channel

Territory

Gender

Occupation

6

## What things make up and effect assumptions?

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1 Solvency capital requirements

2 Discount rate (risky or risk neutral)

3 MADs

4 Profit criteria

5 Demographic Assumptions

6 Financial assumptions

7 NB volume/mix (type/source/size)

7

## Types of long term insurance reserves?

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1 Policies (discounted value of future expected claims/expenses/premiums)

2 IBNR claims

3 Reported but not yet settled

4 Option reserves (costs of options/guraantees)

5 Unearned premium reserve/unexpired risk reserve for group

6 Mismatch reserve

8

## Type of short term insurance reserves

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1 Unearned premium reserve

2 Unexpired risk reserve

3 Ooutstanding claims reserve

4 IBNR

5 Incurred but not enough reported

6 Equalisation/catastrophe reserve

7 Claims in transit

8 Mismatch reserve

9

## Purpose of calculating technical reserves

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1 Liabilities for published/solvency/IM accounts

2 M&A valuations

3 Investment strategy

4 Reinsurance arrangements

5 Estimate recent cost of claims for pricing

10

## Principles of Setting Reserves

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1 Set to ensure all liabilities out of insurance contracts can be met

2 Prudent valuation of all future liabilities for all existing policies including:

3 Guarantees and options

4 Expenses including commission

5 Credit for future premiums

6 Prudent is not best estimate, should include MADs of relevant factors

7 Take into account NTC and valuation method of relevant each policies assets

8 Appropriate generalisations/approximations allowed

9 Interest rate (where appropriate) prudent, taking into account currency of polciy, yields on current assets and on future investments

10 Prudent choice of demographic/persistency/expense assumptions.. 11 Having regard to type of insurance/location of policyholders/admin costs/commission expected

12 Methods and bases in valuation should be disclosed

13 Calculation method should recognise profits approprtiately over duration of each contract, no discontinuities

14 Expenses should not be less than prudent estimate of them

11

## What things effect the implementation of principles of reserves?

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1 Professional guidance

2 Supervisory regime requirements e.g. best estimate + margins instead of prudent reserves

12

## When is a case-by-case method used in short term insurance reserving? What factors taken into account? How are short term reserves calculated if not case-by-case?

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1 Large/unusual claims

2 Statistical estimation if not case-by-case

3 Procedure type

4 Hospital used

5 Which surgeon/consultant/other

6 Policy coverage (any excess/max claims etc.)

7 Age/Sex/Past claims

8 Current levels of medical inflation

13

## If not case-by-case, how are short term insurance policies reserved for? Explain it

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1 Statistical estimation

2 Good for homogeneous claims

3 Volume large

4 Experience stable

5 Split policies into homogenous cohorts

6 Split may be by type/source/location

7 Fit statistical distribution to past claims experience to estimate claims incurred from earned premium

14

## How might sensitivity analysis be used in assumptions setting/reserve calcs?

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1 Find MAD's for prudent estimates of future experience

Assess need for an extent of..

2 Additional risk margins

3 Global reserves

4 Cap req

..to cover potential adverse deviation

15

## How do reserves interplay with solvency requirements?

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1 It's normal a company is required to maintain minimum level of solvency capital by supervisors

2 This is an additional level of protection for policyholders above reserves

3 So reserves and solvency capital adequacy should be considered in tandem not independantly

4 The balance between the 2 vaires between countries

5 Some may have reserves on a realistic basis (low prudence) but large SCR's or vice verca

16

## Why would you calculate best estimate reserves?

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1 Superivsory regime

2 Management information on company performance

3 Preparation for selling company

4 Reward key staff for contribution to growth of company

17

## Explain how to calculate best estimate reserves

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Prudent Assumptions Pricing Cashflows

1 Prudence removed on assumptions

2 Basis like NB pricing

3 Assumptions Explicit eg expenses/persistency/investment return

4 negative values not removed

5 project Cashflows individual or grouped to find PV of expected future profits

18

## Explain market consistent reserves

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1 This approach values liabilities and assets at market value

2 Market values can only be set for liabilities if a corresponding market exists

3 Investment returns based on risk-free returns irrespective of asset class

19

## What do you need to consider for EV

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1 Calculation of ev

2 Assumptions

3 Appraisal value

20

## To work out an appraisal value for M&A what do you consider?

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1 Starting point is the EV

2 Goodwill corresponding to the estimated profits from future business

3 Appraisal value is (1) + (2)

21

## What's the difference between assumptions for appraisal values between seller/buyer?

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1 Seller = realistic

2 Buyer = assumptions include margins

22

## What are the considerations when setting assumptioms for liability valuation?

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1 Regs/Legs

2 territory - Accounting principles governing the accounts in territory

3 Going concern?

4 true/fair value?

5 BE/other reserve basis?

6 Solvency accounts may have different basis

23

## What is the general formula for long term liabilities?

### PVFClaims + expenses + commission + taxes - premiums

24

## What discount rate is prudent in liability valuation? EV valuation?

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Lower means higher present value of liabs!

Higher means lower EV

25

## What is the EV formula? What is the allowance made?

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1 EV= PVFSP in respect of EB (1) + release of shareholder owned net assets (2)

2 Allow for tax as appropriate

26

## Explain net assets in the EV formula

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1 Excess A over those REQUIRED to meet liabs (free surplus).

2 Valued at MV or discounted to reflect lock-in if need to be held for things like solvency capital requirements.

27

## Explain how PVSP calculations differ from product to product?

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2 Conventional WP = PVFPremiums + investment income - claims - expenses + release of solvency reserves

3 Unit-linked = PVF Charges - expenses - benefits in excess of unit fund + investment income earned on release of non-unit reserves

4 Without-profit = release of margins within solvency reserves relative to assumptions used in EV calculation

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