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The Actuary The magazine of the Institute & Faculty of Actuaries

Seminar on realistic valuation of life office liabilities

The Faculty of Actuaries and the International Centre for Mathematical Sciences (founded by Edinburgh and Heriot-Watt Universities) are to host a joint seminar on Realistic Valuation of Life Insurance Liabilities on the 8 September 2004 in Edinburgh.

The seminar which will focus on the needs of a wide variety of audiences including:

  • valuation actuaries (actuarial function holder, with-profits actuary) in life companies;
  • actuaries in audit firms who will have to sign off the ‘realistic balance sheet’;
  • consultants;
  • academics involved in finance who are interested in ‘value of liabilities’ and ‘fair values’; and
  • mathematicians employed in investment banks.

The seminar addresses the need to make as realistic as possible a valuation of life assurance liabilities including using ‘stress tests’ to measure the risks arising from guarantees, options including guaranteed annuity options, smoothing and accrued terminal bonus, consistent with an office’s ‘principles and practices of financial management’ (PPFM) and an office’s duty ‘to treat its customers fairly’ (FSA Core Principle 6). The degree to which liabilities can be immunised (hedged) against exogenous changes in the value of assets will be discussed as part of the use of models to examine different possible financial scenarios (stochastic modelling). The latest techniques of financial mathematics will be discussed.

The Financial Services Authority (FSA) will require all life offices to undertake a ‘realistic valuation’ and an assessment of ‘risk capital margin’ (to cover market, credit, persistency risk) from 2004. This will help determine the amount of capital required according to the individual circumstances of that particular office (the individual capital assessment – ICA).

Liabilities, which are to be subject to an independent actuarial review by a ‘reviewing actuary’, will come within the scope of the audit and the ‘reviewing actuary’ will be required to publish a personal opinion on the valuation of the firm’s liabilities alongside the audit report. This means that the ‘reviewing actuary’ will be required to disclose (in addition to the disclosures on mathematical reserves and required minimum margin (RMM)) whether in his or her opinion:

  • methods and assumptions for calculating realistic reserves are reasonable;
  • the calculations of realistic reserves have been conducted in line with relevant realistic methods and assumptions;
  • the realistic reserves make proper provision for policyholder liabilities, in line with regulatory requirements;
  • the stated amount of the with-profits insurance capital component (WPICC) is correctly calculated (the ‘risk capital margin’ will need to be audited as well as the ‘realistic balance sheet’);
  • Forms 19 have to be audited.

Reinforcing this attention on liabilities, the International Financial Reporting Standard (IFRS) for life companies will require ‘fair value’ of liabilities to be reported from 2006.

The use of financial mathematics to price and value guarantees and options by investment banks means that the latest techniques of financial mathematics may be very relevant to members of the profession. This seminar will provide an excellent opportunity to discuss these matters, to hear from practitioners, and to review the latest techniques employed to value liabilities.

The day-long seminar will be held at the Royal Society of Edinburgh in George Street, Edinburgh. Members of the profession may find the event a useful contribution to their CPD needs. A maximum of six hours may be counted towards formal CPD.An application form and programme are available from the ICMS website at www.ma.hw.ac.uk/icms/meetings/index.html.