Chapter 1: Valuation of Life Insurance Liabilities

Chapter 1: Valuation of Life Insurance Liabilities.

INTRODUCTION. Why is provision for reserve important to life insurers? Make sure company is solvent Make sure there is enough funds to meet the long term obligation of the company Required by law to protect the interest of policyholders.

How does policy reserve arise in a life insurance system? Where level premiums(LP) are paid, LP > COI in the early policy years. There is therefore excess fund which results in build up of reserves. In later years, COI > LP , there is deficit of funds. Reserves are released to cover for deficit..

What is COI? Cost Of Insurance COI at age x of SA=1 payable at the end of year of death if death occurs between x and x+1 is : Risk of death = qx COI at age x = v.qx = Cx/Dx COI at age x of SA=1 payable at the instant of death if death occurs between x and x+1 is : Assuming UDD, on average, mid year payment, COI at age x = v1/2.qx.

VALUATION OF LIABILITIES. 1. MEANING The process of computing the aggregate reserves for a group of in-force policies carried out at the end of a financial year. 2. PURPOSE OF VALUATION Statutory Reporting – valuation Bonus Declaration Determination of Appraisal Value Fund Management.

3. WHEN IS VALUATION CARRIED OUT? At the end of a financial year. The no of years policies have been in force at the end of a financial year(say year t), may not be integral, therefore need to estimate reserve at fractional duration, t+hVx where 0<h<1. 4. VALUATION PROCESS Collection of valuation data Verification of valuation data Computation of policy reserves Completion Statutory Valuation forms and preparation of valuation report Certification of report by the appointed actuary Submission to BNM within 3 months after the end of the valuation date.

Valuation of liabilities. Collection of Valuation Data (Step 1/6) From i) IT dept ii) policy masterfile/records.

VERIFICATION OF INFORCE POLICIES OF VALUATION DATA (Step 2/6) Check data by : Plotting graphs: Eg: no of pol./year, SA/year, premiums/year, bonuses/ year) Check for outliers or any unusual pattern Movement of policies: BOY + NB –Terminations = EOY →Check for NOP, SA and Premiums Reasons: To make sure that the data on business inforce are complete and accurate Required by Insurance Act 1996 PartXIII on Valuation of life business liabilities, Section 56.

COMPUTATION OF POLICY RESERVES (Step 3/6) Calculate reserves for each individual inforce policy Aggregate reserves of individual policies by plan type eg WL par, WL non-par, End par, By plan type because: → Different types of policy have different reserve factors. → Insurance Act requires computation by plan type..

Valuation method is based on Modified Net Premium Reserve Non-Par : tVmod = S.A – S.. ä Par : tVmod = (S + B).A – S..ä where S = sum assured  = modified net premium B = vested bonus. tVmod = modified net premium reserve..

We need to modify premium because: High acquisition cost in the first year Required by Malaysian Law, k=n ( where k is the modified period and n is the premium paying term) To ensure reserve is sufficient to cover for liabilities Under Malaysian Statutory Minimum Reserve Requirement: Reserve = Max ( FPT, 3% Zillmer) reserves. Table – DGI 1996 4% p.a. interest. Reference – Insurance Act 1996(ACT553), Part XIII Valuation of Life Business Liabilities, Section 57 Minimum Valuation Basis, pg 181.

COMPLETION OF FORM SV1 (formerly Form IIA) (Step 4/6).

Valuation System. It should produce results that are : accurate available quickly suitable for statutory reporting..

RESERVES AT FRACTIONAL DURATIONS (t+hV). The no of years that a policy has been in force may not be integral, where 0<h<1. Interpolate between two successive terminal reserves : tV and t+1V. t+hV ≈ (1-h) tV + h. t+1V + (1-h)β where (1-h)β is the unearned net premium Question: What assumptions are used in the above approximation? At anytime during the year, the unearned net premium = (the difference between the time through which the premium has been paid and the valuation time(current time)) * net premium for the year.

FORMULAE CONNECTING SUCCESSIVE TERMINAL RESERVES.

Note: MINIMUM VALUATION BASIS Insurance Act 1996 stipulates Reserve: Max(reserve based on FPT, reserve based on 3%Zillmer) Mortality Table DGI1996, rated down 3 years for female lives Interest: 5% p.a. for annuities; 4.5% p.a. for single premium policies; 4% p.a. for other policies..