A Review of the Statutory Valuation of Long-Term Insurance Business in the United Kingdom

Abstract

This paper considers the approaches currently used by life offices for statutory valuations, and proposes a number of changes to current practice. It builds on the earlier work of Philip Scott's Working Party and a working party which reported on all aspects of unitised with-profits business to the 1996 CILA conference.Recommendations are made for each of the major categories of long-term business, in particular for the introduction of a bonus reserve standard for accumulating with-profits business, whilst retaining the net premium standard for conventional with-profits business. It is proposed that the current net premium approach for non-profit business should be replaced by a gross premium method. The paper also develops a greater codification of the calculation of non-unit reserves on linked business.Considerable emphasis is placed on the requirement for statutory reserves to have regard to PRE. It is assumed throughout that the E.C. Third Life Directive remains in its current form.A number of examples are provided which illustrate the proposed method for accumulating with-profits business. Appendices to the paper include a draft of suggested consequential changes to the Insurance Companies Regulations 1994, and a revised supporting version of the whole of GN8.

The Methodology of Actuarial Science

“…This is a good example of a model that aims to capture the main features of reality in an approximate fashion, while brushing rather broadly over many of the detailsit currently provides the basis for the statutory monitoring of the solvency of the U.K. life assurance industry. In recent years changes to the nature of the products written, principally the introduction of unitised with-profits business, have led to a debate about the extent to which the NPV basis remains an adequate approximation (Scott et al, 1996;Wright et at, 1998). It is interesting to note that the solutions proposed by these working parties are pragmatic developments of the existing contextual models, rather than a radical shift to the use of models based on capital market theories.…”

Fair Valuation of Liabilities

“…For example, the issue of whether or not to reserve for accrued terminal bonus has been around for some time, and the former is now proposed in the FSA's draft Prudential Sourcebook (FSA, 2001a). Also, the Wright working party, Wright et al (1998), proposed a reserving approach for unitised with-profits business, which required attention to be paid to what annual bonus rates could be reasonably expected. 9.1.7 Before discussing some of these issues further, it is worth considering the key distinguishing features of what constitutes`with-profits' business today.…”

Guaranteed Annuity Options: Five Issues for Resolution

“…et al (1996) suggested more`realistic' alternatives to the net premium valuation. Wright et al (1998) made recommendations, particularly regarding unitised with-profits business, which influenced changes to the Insurance Companies Regulations in 2000. Hare et al (2000) considered the market cost of guaranteed cash values, and concluded that reserves on the net premium method would be insufficient in some circumstances.…”