Discounting

Question 1

When should discounting be used?

Answer 1

1. Where it will materially impact the value of the TPs
2. If required by legislation
3. If required by accounting standards
4. Where applicable in the reserving policy

Question 2

What factors should be considered when arriving at a discount rate? (LIT STD I)

Answer 2

1. L - Any rates prescribed by Legislation
2. I - Expected future Investment returns on a portfolio of assets appropriate to the liabilities
3. T - The rate of return on any specific matching assets
4. S - Yields on fixed interest Securities
5. T - Allowance for Tax
6. D - Allowance for Default risk
7. I - Consistency with Inflation assumptions

Question 3

What discount rate should be used in the event that data is not available to inform an appropriate rate?

Answer 3

A risk free discount rate

Question 4

How is disclosure impacted by discounting?

Answer 4

Results should disclosed both before and after discounting