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Lecture 1 ASC600-CHP 1

This document discusses the valuation of life insurance liabilities. It covers topics such as the purpose of valuation, common valuation methods and techniques, the valuation process, and formulas used to connect successive terminal reserves. Valuation is important for statutory reporting, bonus declaration, and fund management. It involves collecting policy data, verifying data, computing reserves, and submitting a valuation report to the regulator annually.

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64 views

Lecture 1 ASC600-CHP 1

This document discusses the valuation of life insurance liabilities. It covers topics such as the purpose of valuation, common valuation methods and techniques, the valuation process, and formulas used to connect successive terminal reserves. Valuation is important for statutory reporting, bonus declaration, and fund management. It involves collecting policy data, verifying data, computing reserves, and submitting a valuation report to the regulator annually.

Uploaded by

elisa_mr
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ACTUARIAL PRACTICE FOR LIFE

INSURANCE AND TAKAFUL


ASC600
CHAPTER 1: VALUATION OF LIFE INSURANCE LIABILITIES

DR. NORAZLIANI MD LAZAM


Topics Covered
• MEANING
• PURPOSE
• VALUATION METHODS
• VALUATION TECHNIQUES
• COMPARISON OF VALUATION METHODS
• WHEN IS VALUATION CARRIED OUT?
• RESERVES AT FRACTIONAL DURATIONS
• VALUATION PROCESS
• VALUATION SYSTEM
• FORMULAE CONNECTING SUCCESSIVE TERMINAL
RESERVES
OVERVIEW
q Why provision for reserve is important to life insurers?

• To make sure the company to remain solvent


• To make sure there is enough funds to meet the long term obligations of the
company
• Required by law to protect the interest of policyholders

q How does policy reserve arise in a life insurance system?

• When level-premiums (LP) are paid, in the early years of policy, LP > COI, causes
the build up of excess funds of reserves. In later years, COI > LP, causes deficit of
funds. Then, reserves are released to cover for deficit.
What is COI?
• COI is a Cost Of Insurance

• A risk of death for (x) = qx, where death occurs between x and x+1:
• For RM1 sum assured payable at the end of year of death for (x):
ØCOI at age x = v.qx = Cx/Dx

• For RM1 sum assured payable at the instant of death for (x), assuming
UDD, on average, mid year payment:

ØCOI at age x = v1/2.qx


Valuation of Liabilities
q MEANING q WHEN IS VALUATION CARRIED OUT?
• The process of computing the aggregate • At the end of a financial year.
reserves for a group of in-force policies • The number of years of policies have been in
carried out at the end of a financial year.
force at the end of a financial year (say year t),
may not be integral, therefore needs to
estimate reserve at fractional duration, t+hVx
q PURPOSE OF VALUATION
where 0<h<1.
• Statutory Reporting – valuation
• Bonus Declaration
• Determination of Appraisal Value
• Fund Management
Valuation of Liabilities
q VALUATION PROCESS

• Collection of valuation data


• Verification of valuation data
• Computation of policy reserves
• Completion SV 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
q COLLECTION OF VALUATION DATA (Step 1/6)
• From:
• IT department
• Policy Masterfile/records

• Required data:
• Plan code – to calculate by policy type • Name
• Sum insured/assured • Status code: inforce/lapse/surrender/paid-
• Gross annualized premium (office premium) up/expired/matured
• Premium type : single/annual • Policy term
• Entry age • Maturity date
• Effective date/date of issue • Expiry date
• Policy number – for random checking • Vested bonuses
Valuation of Liabilities
q VERIFICATION OF INFORCE POLICIES OF VALUATION DATA (Step 2/6)

• Check data by :
• Plotting graphs:
• Eg: number of policies (NOP)/year, SA/year, premiums/year, bonuses/year
• Check for outliers or any unusual pattern

• Movement of policies:
• Beginning Of Year (BOY) + New Businesses (NB) – Terminations = End Of Year (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, Part XIII on Valuation of life business liabilities, Section 56
Valuation of Liabilities
q COMPUTATION OF POLICY RESERVES (Step 3/6)

• Calculate reserves for each individual inforce policy

• Aggregate reserves of individual policies by plan type, e.g.: WL par, WL


non-par, End par, End non-par

• By plan type because:

• Different types of policy have different reserve factors.


• Insurance Act requires computation by plan type.
Valuation of Liabilities
• Valuation method is based on Modified Net Premium
Reserve:
• Non-Par: tVmod = S.A – S.b.ä
• Par: tV
mod = (S + B).A – S.b.ä
where:
• S = sum assured
• b = modified net premium
• B = vested bonus
tV
• mod = modified net premium reserve

• Participating bonus is divided into two:


• Simple Reversionary Bonus (SRB), where bt = (1+(t-1)b%)
• Compound Reversionary Bonus (CRB), where bt = (1+b%)t-1
Reference – Insurance Act 1996(ACT553), Part XIII Valuation of Life
Business Liabilities, Section 57 Minimum Valuation Basis, pg 181
Valuation of Liabilities
• 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
Valuation of Liabilities
q COMPLETION OF FORM SV1 (formerly Form IIA) (Step 4/6)
SUMMARY AND VALUATION OF POLICIES
Total Gross Net
Number Sum Vested Net
Annualized Premium S.A B.A βä
of Policies Assured Bonus Liabilities
Plan Premium

Par Policy
WL
End
Term

Non-Par Policy

Annuities
SP policies Where ;
Investment- Net Liabilities = SA + BA – βmod ä
linked
Valuation of Liabilities
q VALUATION SYSTEM

• It should produce results that are :


• accurate
• available quickly
• suitable for statutory reporting
Valuation of Liabilities
q RESERVES AT FRACTIONAL DURATIONS (t+hV)

• The number 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.
Valuation of Liabilities
q FORMULAE CONNECTING SUCCESSIVE TERMINAL RESERVES
• (tV + P ) (1+i) = 1.qx+t + px+t .t+1V (Equation 1)
• (tV + P ) (1+i) = t+1V + (1-.t+1V).qx+t (Equation2)
where (1-.t+1V) is the net amount at risk

q INTERPRETATION OF SUCCESSIVE TERMINAL RESERVE FORMULAE


• (tV + P ) (1+i) = qx+t + t+1V . px+t (Equation 1)
(tV + P) (1+i) Reserves at time t plus premium due at time t , accumulated with interest i to the end of
the year
= is sufficient to pay for
qx+t + px+t .t+1V the cost of insurance of sum assured 1 and the reserve at time t+1 for the survivors

Ø Question : Interpret formula (Equation 2)

• Note: MINIMUM VALUATION BASIS


Valuation of Liabilities
q 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.

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