Seminar on Realistic Valuation of Life Office Liabilities

8 September 2004

The Royal Society of Edinburgh

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Background and Purpose
The Financial Services Authority (FSA) in the UK is requiring life offices to undertake a 'realistic valuation' and an assessment of 'risk capital margin' (to cover market, credit, persistency risk) from 2004 and determine the capital required by life offices according to the individual circumstances of that office (Individual Capital Assessment).

Liabilities are to come within the scope of the audit. Liabilities are to be subject to an independent actuarial review by a 'reviewing actuary'. The 'reviewing actuary' will be required to publish a personal opinion on the valuation of the firm's liabilities alongside the audit report. The 'reviewing actuary' will be required to disclose (in addition to the disclosures on mathematical reserves and 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 correct (so the 'risk capital margin' will need audited as well as the 'realistic balance sheet'),
  • Forms 19 have to be audited.
The International Financial Reporting Standard (IFRS) for life companies will require 'fair value' of liabilities to be reported from 2006.

Investment banks use financial mathematics to price and value options. Options, combined with investment of the underlying, provide guarantees. The techniques used by investment banks and the latest techniques of financial mathematics may be very relevant to actuaries.

The seminar provides an opportunity to discuss these matters, to hear from practitioners and to review the latest techniques employed to value liabilities.

Continuous Professional Development (CPD)
Members of the actuarial profession may find the event a useful contribution to their CPD needs. The amount of hours recorded is left to the discretion of the individual. However, a maximum of 6 hours may be counted towards formal CPD.


09.00-09.15 Coffee
Introduction - Scientific Director of International Centre for Mathematical Sciences (John Toland, FRS) and President of the Faculty of Actuaries (Harvie Brown)

Introduction to the Realistic Balance Sheet and Risk Capital Margins (Market, Credit and Persistency risk) as per CP 195 (Form 19) and the valuation as per PPFM (CP 207 and CP 167)
Colin Ledlie (Standard Life)

Mathematical theories of valuation in complete and incomplete markets
Mark Davis (Imperial College)

Calculation of Asset Shares, Valuation of Guarantees, Valuation of Options, Valuation of Smoothing Constraints as per the PPFM -Theory, Practice. Size of reserves if market does not supply the financial instruments to do the hedging. Stochastic Modelling - scenario testing, volatility of the scenarios, sensitivity of solvency to equity volatility, probability of ruin etc.
Nigel Knowles (Standard Life) & Michael Payne (Scottish Widows)
11.15-11.30 Coffee

Calibration of Asset Models. Optimal investment strategy, static versus dynamic hedging and transaction costs. Consequences of being prepared to adjust portfolio only once a year. 'Real' probabilities as opposed to 'risk-neutral' probabilities.
Andrew Smith (Deloitte), Craig Turnbull (Barrie and Hibbert)
12.30-13.00 Discussion 1
13.00-14.00 Lunch

Calculation of Fair Values for Accounts from 2006 and the relationship between Fair Values and Realistic Liabilities. How volatile will profits be?
Steve Mills (PWC)

The Individual Capital Assessment (ICA) on top of the Realistic Liabilities and the Risk Capital Margin -Stress tests
David King (Ernst and Young)
15.15-15.45 Discussion 2
15.45-16.00 Tea

Implications, consequences for life offices.
Mike Urmston (Norwich Union)
16.30-16.45 John Jenkins (KPMG)
16.45-17.15 Discussion 3
17.15 Close

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