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The Realistic Reporting of With-Profits Business. Reference Paper for the Discussion

  • D. J. P. Hare (a1), G. Craske, J. R. Crispin, A. J. Desai, D. W. Dullaway, M. A. Earnshaw, R. Frankland, G. A. Jordan, M. G. Kerr, G. M. Manley, J. L. McKenzie, R. A. Rae and M. C. Saker...

Abstract

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.

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Financial Services Authority (2001). Consultation paper 97: ‘Integrated prudential sourcebook’ (June 2001).
Financial Services Authority (2002a). ‘Feedback statement on the with-profits review’ (May 2002).
Financial Services Authority (2002b). Consultation paper 143: ‘Integrated prudential sourcebook — feedback on chapters of CP97 applicable to insurance firms and supplementary consultation’ (July 2002).
Financial Services Authority (2002c). Speech by H. Davies: ‘Life insurance — a more realistic approach’ (October 2002).
Financial Services Authority (2003a). Consultation paper 167: ‘With-profits governance, the role of actuaries in life insurers, and the certification of insurance returns’ (January 2003).
Financial Services Authority (2003b). Press release: ‘Required minimum margin: letter to CEOs of life insurance firms’ (January 2003).
Financial Services Authority (2003c). Speech by J. Tiner: ‘Westminster & City 20th Anniversary Life Insurance Conference — Current consultation and the regulatory agenda’ (February 2003).
Financial Services Authority (2003d). Speech by J. Tiner: ‘Developments on with-profits governance and the role of actuaries in life insurers and highlights of the 2002 convention for life actuaries’ (February 2003).
Financial Services Authority (2003e). ‘Realistic Reporting Approach: Letter to CEOs of life insurers’ (March 2003).
Financial Services Authority (2003f). ‘Realistic Reporting: Letter to CEOs’ (July 2003).
Financial Services Authority (2003g). Consultation paper 195: ‘Enhanced capital requirements and individual capital assessments for life insurers’ (August 2003).
Ford, A., Benjamin, S., Gillespie, R.G., Hager, D.P., Loades, D.H., Rowe, B.N., Ryan, J.P., Smith, P. & Wilkie, A.D. (1980). Report of the Maturity Guarantees Working Party. Journal of the Institute of Actuaries, 107, 103212 and 215–231.

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