07/08/2021

Life Actuarial Valuation

Training

Facilitator: Santosh Lamichhane

01 Actuary and Valuation 02 Balance sheet and Fund

03 Mathematical Reserve 04 Surplus Allocation

Relationships Between
05 06 Analysis and Results
factors
 Actuary and Actuarial Valuation
Who is an actuary?
Actuary means a fellow member of any of the following actuarial professional bodies: -
a) Institute and Faculty of Actuaries, UK
b) Institute of Actuaries of India
c) Society of Actuaries, USA
d) Canadian Institute of Actuaries
e) Institute of Actuaries of Australia

What is an actuarial valuation?

An actuarial valuation is a mathematical analysis performed by an actuary that determines the value of the
assets and liabilities as of a specific date (typically at year-end date) for an insurance company..

• Determination of Reserves: the reserves so determined by the Appointed Actuary are adequate to
meet all liabilities (including contingent) in respect of insurer’s policies on its books;
• Determination of Surplus: the surplus so determined by the Appointed Actuary, shall be distributed
to the policyholders and shareholders as prescribed by Directive.
 What is the purpose of the valuation?
Bonus allocation
 Determining the emergence of surplus.
 Allocation of bonuses to policyholders from the surplus.
 Dividends to be paid to the shareholders from the surplus.

Understanding financial and risk position of the company (prudent view)

 Demonstration of solvency position – long term sustainability of the company.
 Understanding the risk profile of business – hence come up with risk mitigation strategies
and capital allocation.
 Adequacy tests of current level of premiums.
 Valuation of a company during Mergers & Acquisition..
Regulatory requirement
 The supervisor establishes requirements for the valuation of assets and liabilities for
solvency purposes.
 View of Balance sheet Maintenance of Fund
Amount of money that a company needs Life fund:
to hold now for all of the existing policies,
in order to be able to pay for all the claims
Life Fund = Premium Income + Investment Income + other
and expenses that it anticipates in the
permissible income – Payments to policyholders.
future.
Shareholders’ fund:
Assets Liabilities
It consists of share capital, reserve and surplus, catastrophic
reserve and compulsory reserve fund. Distribution to shareholders
Free Assets Surplus
shall be made out of this fund. Further, transfer to compulsory
Capital reserve fund shall also be made out of this fund.
Admissible and
requirement
inadmissible
assets other liabilities Compulsory Reserve fund:
This fund contains the transfers of amount from the
Margin shareholders’ fund exclusively for maintenance of solvency
Admissible margin, ex-gratia payments to policyholders. All such payments
assets covering from this fund shall be subject to approval of Beema Samiti.
Mathematical Best Estimate
Reserves Liability
 Liabilities => Reserve
What is Reserve?
Amount of money that a company needs to hold now for all of the existing policies, in order to be able to pay
for all the claims and expenses that it anticipates in the future.

The present value of the future cash flows of an insurance policies.

Gross Premium Reserve [Mathematical Reserve]

OUTGO INCOME

Benefits [death/maturity] Premium Income

Vested bonus Investment return
Cost of bonus
Provision for future bonus
Management expenses
Renewal Expenses
Claim Expenses
Commission
 Liabilities => Reserve
Why do we need to reserve?
 To meet future liabilities,

 To ensure that company can meet claim payments when necessary.

The higher the benefit promised to the policyholder, the higher the reserve held by
the insurance company needs to be.
 Liabilities => Reserve
Three key items that are required to calculate reserves and which affect the reserves
Data
• Forecasting future liability
using past and current data
• Data checks [sources,
completion, consistency,
disclosure, incomplete, and
missing]
Methodology
• Set out the valuation
methodology for main benefit
and additional benefit
• Calculation of future bonus
reserve
• Bonus earning capacity
• Bonus philosophy
• Need to be consistent from
one year to the next
Assumption
• What are assumptions and
why do we need them?
• What are key assumptions?
• How are assumptions derived?
• Derivation of best estimate
assumptions: experience
analyses.
 Surplus Allocation : Par Products

Unallocated surplus b/f Unallocated surplus c/f

Policyholders'
Valuation
Surplus emerging over Fund
Surplus Cost of Bonus*
the year Transfer of ≥ 90% (P/H Fund)
Life Fund of Surplus

Math Transfer of
balance
Reserves
of Surplus
emerging
Bonus Rate
Shareholders' Fund
(S/H Fund)
Transfer from S/H Fund
requi red if surplus emergi ng &
unall ocated surplus b/f is
Compulsory reserve fund insuffi cent to cover CoB

*The cos t of re gul a r bonus i s the a mount a dde d to PH’s a ccounts , or i n the ca s e of conve nti ona l WP, the cha nge i n gua ra nte e d
l i a bi l i ty on the s ta tutory re porti ng ba s i s a s a re s ul t of the bonus a ddi ti on. The cos t of bonus i s a djus te d for a ny di ff e re nce
be twe e n the a ctua l cos t a nd the e xpe cte d cos t of the pre vi ous ye a r’s bonus e s .
 Surplus Allocation : Non-par products

Surplus Transfer 100% of Surplus

Valuation
emerging Shareholder’s Fund
Surplus
over the year
Life fund
Math
Reserve
Compulsory reserve fund

Maintenance of Compulsory Reserve Fund:

In every fiscal year, the insurer’s Appointed Actuary shall determine the amounts transferrable to Compulsory
Reserve Fund out of the transferrable surplus to shareholders in Participating Policies Account and Non-
Participating Policies Account.

The objective of maintaining Compulsory Reserve Fund is to maintain solvency margins prescribed by Beema
Samiti. Moreover, this can also be used to create and maintain any other reserve where the Appointed Actuary
feels necessary to keep aside or where Beema Samiti directs to do so.
 Relationships between different factors

Transfer to
Provisions S/H fund Dividend
Math Emerging
and
Reserve surplus
guarantees
Transfer to Bonus rate
cost of for
bonus Policyholder

Transfer to cost of
bonus

When this happen, company will have two option to maintain the bonus level.
1. Either company must decrease the rate of bonus for policyholder.
2. Or the company must drag the money from S/H fund/ Compulsory
Reserve fund to maintain the bonus level.
 Balance Sheet & Solvency
Valuation Balance Sheet Beema Samiti require companies to maintain a specified level
Assets of “solvency capital” in addition to mathematical reserves
Life Insurance Fund Amounts as shown in the Audited
Balance Sheet Solvency Margin
Transfer of current year’s The amount of transfer of surplus
surplus to shareholders (arising in the current year) to Available Solvency Margin Required Solvency Margin
shareholders’ funds in the Statement of = Admissible Assets = max (50% of Paid Up Capital,
Income of Life Insurance Fund, if any – Mathematical Reserves Adj Math Res x 3% + SAR x0.2%),
Balance of und for the Life Insurance Fund + transfer of surplus (net of Re & Adj)
purpose of Valuation Balance to shareholders – Other Liabilities where Adj Math Res = Math Res (net
Sheet of Re & Adj) if Reinsurance Ratio is >=
Deficiency (Negative surplus), 15%, others 85% x Gross Math Res
if any Solvency Ratio =
Total Available Solvency Margin
Required Solvency Margin
Liabilities Margin Level Corrective Action
Net Liabilities Mathematical Reserves (net of Greater than 1.5 Green Routine Action
Reinsurance and adjustments) Greater than 1 but less than Greater supervision with
Surplus, if any Used for surplus allocation for 1.5 Yellow on-site intervention
policyholders and shareholders Enforcement Action/
Total
Less than 1 Red Capital Injection
 Results and Sensitivities

• Results need to be presented product wise.

• Movement in valuation results from one year to the next need to
be explained. Communication
• Impact on the surplus emergence due to the difference in valuation
basis versus pricing basis.
• Need to quantify the impact in the valuation results from changes
in assumptions; methodology, data, one-off change.
Commercial
• Adequacy of the bonus rates.
Item Sensitivity Analyses Results
Judgement
Discount rate: base
Discount rate: base +1% Impact on Impact on
Mathematical Solvency
Discount rate: base -1% Reserve (net of Ratio
Mortality rate: base reinsurance & Actuarial
Adjustment)
Mortality rate: +150% of the base Judgement
Mortality rate: -50% of the base
 Questions

&

Thank You!