The paper addresses some of the practical and theoretical issues raised by the move to a market consistent calculation of realistic liabilities and solvency capital for with-profits business. It also proposes some changes to the presentation of the realistic balance sheet, which the authors believe will provide greater transparancy, and more closely reflect the way in which with-profits business should be managed in future.

This paper was written at the request of the Life Research Committee of the United Kingdom Actuarial Profession's Life Board. It concerns the valuation of U.K. with-profits business, with particular attention to the market-consistent ‘realistic reporting’ basis currently being used in the U.K. by the regulator, the Financial Services Authority (FSA). The paper surveys recent regulatory activity concerning the development and introduction of the new valuation approach, and puts it into the context of a survey of alternative methodologies, both deterministic and stochastic. The particular issues arising when considering prudential solvency are discussed, and various approaches are reviewed and compared with market consistent methods. Numerical examples are given, which demonstrate potential issues (regarding comparability and consistency) with the FSA's proposed approach — in particular the sensitivity of results to model calibration. The authors support the FSA's move to a stochastically-based framework for solvency measurement, but highlight some issues which need to be taken into account.

This paper focusses on some practical issues that can arise when developing methodologies for calculating benchmark figures for extreme market events, particularly in the context of the Financial Services Authority's ICAS regime. The paper limits discussion to equity and interest rate risks. Whilst not intended to constitute formal guidance, it is hoped that the material contained within the paper will be useful to practitioners. The paper acknowledges the role of prior beliefs in the choice of data to be used for modelling and its influence upon the ensuing results.

of the discussion held by the faculty of actuaries Mr R. Frankland, F.I.A. (introducing the paper): It was about 18 months ago that we were asked by the Life Practice Executive Committee to consider whether we could attempt to assess what sort of market movements could be demonstrated to be consistent with a test described as being based on 1 in 200 year events in the context of the ICAS regime.I am not intending to summarise the paper or its conclusions but did want to make a few remarks about the timing of the paper. I should also like to provide a brief summary of the main points which emerged from the sessional meeting at Staple Inn. However, first I would like to offer an observation that has emerged as a result of discussing this paper since its publication. This arose from a relatively trivial comment: "Does it really matter what 1 in 200 years means? Surely, all that matters is the magnitude of the individual tests, and these could be prescribed by the regulators without reference to any probability measure?''Based on the experience of the last year and a half, it is tempting to follow that approach. But there are two reasons for not doing so. The first of these is that if these tests are set without reference to some form of standard, then different risks will be expected to be treated more or less harshly than others. In a rational, market-driven world this will tend to favour organisations which take particular risks relative to other organisations, which is not only seen as being fundamentally unfair and imprudent but could lead to systemic risk as companies are encouraged to manage their capital rather than their risks and are attracted to take on similar risks.The second, more practical, issue is that unless regulators are to develop a much more sophisticated approach to risks of combinations of events, it leaves companies with no guidance as to how to derive their own combination tests.This may seem obvious. However, it does raise one fundamental question, and perhaps one which the Profession may wish to consider. If using a value at risk based test, that is determining how much capital is needed to ensure that the organisation will be able to meet its claims subject to all the prescribed tests, is the most appropriate way of harmonising the risk levels necessarily on the basis of attempting to equalise the probability of each event tested occurring over a 12 month period? Other means of harmonising risk levels do exist and may be both more relevant and require less extreme extrapolation of the available data.Such considerations lie outside the scope of this working party's work but may be worth further reflection. It is worth noting that a working party has been established by the Profession to consider the whole question of whether a value at risk test is the most appropriate mechanism for ensuring capital adequacy. So I would expect this issue to be addressed further going forward. A.J. 15, II, 275-293 (2009) B.