Valuaions Flashcards
(13 cards)
The main purpose for performing valuations
- provide summary information regarding the financial position of the benefit provider to allow relevant parties to make sensible and informed decisions
Market value of liab
Amount that a third party would be willing t pay in an arm’s length transaction in a deep and liquid market for the ben providers book if the provider failed due to an unforeseen event.
A deep market - one with such capacity that large transfers would not materially affect the market prices.
Market consistent liab value for health
Mortality and morbidity assumptions - risk premium quoted by reinsurance
Expense assumptions detrmeined by reference to expense agreements available in the market
Insurer may provide a quotation for buying out a pensionerr or long term care insurance benefits in payment book
If cash flows are certain , establish a replicating portfolio and discount the cash flows using a risk-free disocunt rate.
Hard to get these as this informatio may not be available easily - therefore, BEL + a risk margin.
Principles of performing a valuation
- An appropriate degree of prudence
- Completeness
- Consistent valuation of assets and liabilities
- consistency between valuations
- Suitability of assumptions
- Proportionality
- Disclosure
The steps in performing valuation
- Assessing purpose and users
- Considering the previous valuation
- Obtaining information and data, and data checking
- Setting a basis
- Performing the calculations
- Comparing the position to that at the previous valuation
- Reporting on the results, which depends on the users and purposes of a valuation.
At all stages, the actuary should consider professional standards and any applicableu regulation
Purpose of valuation
- Statutory reporting
- Published accounts - valuation results used as an input into financial statements that are publicly available as published accounts
- Distributing surplus proprietary insurers will need to decide how much surplus can be give to shareholders as dividends. With profit - determine appropriate bonus levels
- Internal decision-making - investment strategy, reinsurance arrangements , pricing and benefit e-sign , assessing economic capital and cost-benefit analyses relating to operational decisions
- Merger, acquisition,transfer,and discontinous-
- Disclosure to customers- benefit provider at be required to make disclosures to customers about the entity’s financial health and projected benefits
- Remuneration - employers use bonuses as incentives - trigger for the bonus being paid may enquire the valuation of A & L and similar valuation output.
There are no direct payments involved in a statutory valuation but it is important to get right
- Funding levels too high or too low will trigger intervention by the regulator
- The use of weak assumption might encourage benefit improvements that cannot be afforded
- Assumptions used may affect benefits directly
- If the statutory result is used to set contribution rates, this will influence the actual cash flows
- If surplus distribution is determined based on statutory result
- To the extent that actual returns exceed the CoC , holding larger reserves would increase actual profits
performing calculations for val
1) present value method
For a funded or partially funded ben
Current value of ben is calculated by present value of future assets and liab for a group of members or covered lives
2) Projection
Social security schemes
Unfunded or very small funds that are not based on true cost of accrual
Assess under the current funding arrangements whether benefits can be paid and reserve funds can be maintained at the required level
projection for social security
1) demographic projections
2) projecting benefits and expense outgo and contribution income
3) the demographic projections need to combined with projected estimates of:
- proportion of populations who are contributors or beneficiaries of the scheme
- covered earnings of contributing members
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Projected tota contribution income and benefit expenditure
- calculations start with carrying out demographic projections and then projecting benefit and expense outgo and contribution income
- The demographic projections need to be combined with projection estimates of:
- proportions of the population who are contributors or beneficiaries of the scheme
- covered earnings of contributing members
- benefit amounts payable to different categories of beneficiary - -
Projecting benefit outgo
1) factor method
For each future point in time - benefit outgo for a particular rout is the product of:
Population of that group
Proportion of the population receiving benefits
The average benefit level for that group
This is then summed over all groups
2) survival method
The benefit outgo for the next year for people becoming eligible for the benefit in that year
This would be the product of:
- population becoming eligible in the next year
- the proportion of the eligible population receiving benefits
- the average benefit level for that group
This amount is then projected forward allowing for:
- benefit increases
- survival
- continuing to qualify for the benefit
Summing over all future periods gives the total benefit cost for people who start to receive the benefit in the next year.
Why do regulators require statutory reporting
1) benefit security : to check that potential beneficiaries have a reasonable prospect of receiving the promised benefits
2) compliance - to ensure that insurer or benefit arrangement is complying with all appropriate regulation and legislation.
