Chapter 22 - Setting assumptions (2)

Question 1

What should be considered when setting the assumptions used to determine the liabilities shown in a company’s published accounts

Answer 1

• Whether the accounts are prepared on a going concern basis or a break-up basis
• Whether the accounts are required to show a true and fair view
• Whether reserves are required to be assessed as best estimates or on another basis,

Question 2

What is the difference in setting the reserving basis compared to pricing basis

Answer 2

An important difference in setting the assumptions for the reserving basis as opposed to a pricing basis is that the policies are already in force which can provide important information for the purpose of setting assumptions

Eg, we have the demographic assumptions as we now know who the policyholders are

Question 3

How to calculate the embedded value

Answer 3

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

Question 4

What is the appraisal value

Answer 4

It is the sum of the embedded value and goodwill.

Goodwill is the brand value of the company

Question 5

Increasing the discount rate increases the degree of prudence?

Answer 5

YES