Valuation of Life Insurance Liabilities - Chapter 1 - TYPES OF VALUATIONS AND BASIC REQUIREMENTS

Overview

principle liablilities of a LIC are due to contingent benfits granted on its long term policies and contracts
small cahnge if value can have significant impact on co's earnings
reserves - liablilities for amts inc co is boligate to pay in accordance w/ policy
amts usually uncertain or contingent as to exact amt and/or time of payment
some reserves for incurred but unknown to ins co - claim (or loss) reserves
some reserves for event not yet happened but ins co obligated to pay - policy reserves
actuarial reserves = policy reserves (as far as text is concerned)
actuarial valuation - process of determining actuarial reserves
theory behind reserves (law of large numbers) only true for blocks of policies, not at the indiv policy level

Types of Valuations

Statutory Valuations
- used to help regulators assess financial health of the company
- conservative assumptions since emphasis on solvency
- in US - assumptions and methodology very explicit in the law
- US rules based on old practical decisons made in pre-computer era
- trend toward more than just "cookbook" - need to ensure liabilities good and sufficient
GAAP Valuations
- required if stock is publicly traded or owned by a apublicly traded co
- objective: accurate allocation of income to period earned
- assumptions required to be reasonable and conservative, not as conservative as stat
- Canada - GAAP = Stat (using PPM)
- incorporates explicit lapse/surrender assumptions
Gross Premium Valuations
- used to produce "best estimate" value of co's liabilities
- less conservative than GAAP
- may be appropriate to determin co value for acquisition/merger
- incorporates explicit lapse assumption
- PV future gross prems - PV future benefits
- PPM is a gross prem valn
- value-added financial measurement - offshoot of GP Valn
  - uses stat reserves, but future values of stat profits recognized in valn
Tax Reserve Valuations
- used to calc reserves for determing taxable income
- Canada - 1.5 yr FPT w/ csv floor
  - may be > or < statement Vx
- US - 1958-1984 based on stat Vx w/ adjustments
  - 1984+ - FPTR (Fed Prescribed Tax Reserves)

Effects of Stat Reserve Requirements

Gross Premium Levels
- indirectly affect since guar prems typically set at level to avoid def reserves
- take into account cost of capital required
Product Design
- guar rates to avoid def reserves
- avoid product features too difficult to reerve
- int guarantees on annuities affected by CARVM
FIT
- FPTR make it fairly insensitive to Stat
- if unspecified in tax code - follow stat practices
- Tax Vx <= Stat Vx
Divs to PO
- if div formula uses Stat Vx, significant impact
- if doesn't use Stat Vx, still probably uses some stat info to allocate surplus
Stat Earnings
- obvious - stat Vx affects Stat earnings
- US: divs to stockholders limited to accum stat earnings of Co
Important Indicators
- several industry measures are based on Stat Financial Measures (like rating agencies)
Other Considerations
- pricing profit objectives might be accum surplus / stat Vx > y% at year z
- reserving methods do not directly affect total profitability of a product, only emergence of profit by year (pre-tax)

Valuation Requirements

3 major components - math calc, verification of results, actuarial opinion
Mathematical Calculations
- PV of excess of future benefits over future premiums
- based on assumptions for lapses, mortality, interest, etc
Verification of Results
- demonstration that assumptions are reasonable
- interest given more scrutiny o flate
- structure of assets need to be viewed together w/ structure of liab
Actuarial Opinion
- qualified actuary signs opinion re: appropriatness of Vx

Valuation Requirements in the US

SVL
Opinion shoudl list items and amounts for which expressing an opinion
OK to have sep opinions for separate blocks
indicated reliance on others
requires an actuarial analysis of reserve and assets supporting reserves
Opinion as to Non-Guaranteed Elements
- includes contracts such as (if they contain non-guar elements)
  - single and periodic premium DAs
  - UL contracts w/ fixed and/or flex prems
  - indeterminate premium life contracts
  - single and periodic premium ilfe contracts
  - ren and conv term ins contract which do not guar the prems payable on renewal or which provide fo rrenewal on teh then current basis
- if contract ahs charges or benefits which vary at co discretion (excl divs and sep acct based contracts) then A.S. aslo needs
  - statement containing determination procedure for non-guar elements
  - 8 interrogatories dealing w/ determination of non-guar elements, supportibility and relationship of current non-guar elements to those used in sales illustrations
  - actuarial opinion related to non-guar elements signed by a MAAA
RBC Requirements
- Four components
  - Asset quality and payment default risk
  - Insurance Risk (pricing)
  - Interest Rate risk (disintermediation, reinvestment)
  - Business risk
- represents "minimum" capital and surplus level for a particular co

Valuation Requirements in Canada

big gap here since 8I-U and not 8I-C

Copyright © 2004 Steve Welander.
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