Factors to consider when setting discontinuance terms
- Contracts for which to offer discontinuance terms
- Forms of discontinuance terms offered
- Asset share
- Policyholders’ reasonable expectations
- Competitive considerations
- Treating customers fairly
- New business disclosure
- Ease of calculation
- Cost of implementing the discontinuance terms
- Frequency of change of discontinuance terms
Factors affecting the strength of the basis
- The reason for the valuation
- The needs of the client
- Regulation
Reasons for calculating provisions needed by a provider include the following:
- To determine the liabilities to be shown in the providers published accounts and reports
- Demonstrating supervisory solvency
- To determine the liabilities to be shown in internal management accounts
- To value the provider for merger or acquisition
- To determine whether any discretionary benefits can be awarded
- To set future contributions to a benefit scheme
- To value benefit improvements for a benefit scheme
- To calculate discontinuance/ surrender benefits
- To provide disclosure information to beneficiaries
- To influence investment strategy
Main concepts that have been widely used in relation to the periodic financial accounts of all businesses:
- The “going concern” concept: the enterprise will continue in operational existence for the foreseeable future
- The “accruals” concept: revenue and costs are recognized as they are earned or incurred, not as money is received or paid
- The “consistency” concept: there is consistency of accounting treatment of like items within each accounting period and from one period to the next
- The concept of “prudence”: revenue and profits are not anticipated, and provision is made for all known liabilities, whether the amount of these is known with certainty or is a best estimate in light of the information available
In analysing accounts, attention should be paid to
- Any accounting rules, guidance and practices in the country concerned
- Whether accounts should be prepared on a going concern basis and should give a true and fair value
- Any changes in accounting practice
- Basis used for valuation of assets
- Any exceptional events during the accounting period
Ratios to be considered to get an indication of the strength of reserves:
- Incurred expenses to premium income
- Commission to premium income
- Operating ratio
- Outward reinsurance premium income to gross premium income
Disclosure to beneficiaries of benefit schemes could include details on
- Benefit entitlements
- Contribution obligations
- Expense charges
- Investment strategy
- Risks involved
- Treatment of entitlements in the event of insolvency
Common aims that most accounting standards attempt to achieve:
- Recognizing the realistic costs of accruing benefits
- Avoiding distortions resulting from fluctuations in the flow of contributions from the employer to the pension scheme
- Consistency in the accounting treatment from year to year (although not necessarily from company to company)
- Disclosure of appropriate information
Differences that exist relate to the:
- Emphasis on the relative importance of the balance sheet and the income statements in demonstrating a true financial picture
- Choice of actuarial methodology
- Flexibility in the setting of assumptions
- Smoothing of year on year fluctuations
- Amount of information to be disclosed
Possible disclosure requirements that may be needed include the:
- Assumptions used
- Actuarial method used
- Value of liabilities accruing over the year
- Increase in the past service liabilities over the year
- Investment return achieved on the assets over the year
- Surplus/deficit
- Change in the surplus/deficit over the year
- Benefit cost over the year in respect of any director
- Membership movements
A provider will want to analyse the surplus arising over a year or longer period of time in order to:
- Show the financial effect of divergences between the valuation assumptions and the actual experience
- Determine the assumptions that are the most financially significant
- Show the financial effect of writing new business
- Validate the calculations and assumptions used
- Provide a check on the valuation data and process, if carried out independently
- Identify non-recurring components of surplus, then enabling appropriate decisions to be made about the distribution of surplus
- Reconcile the values for successive years
- Provide management information
- Provide data for use in executive remuneration schemes
- Provide detailed information for publication in the provider’s accounts
- Demonstrate that the variance in the financial effect of the individual levers is a complete description of the variance in the total financial effect
- Give information on trends in the experience of the provider to feed back into the actuarial control cycle
Apply - Actual and expected revenue accounts can be compared to answer questions such as:
- Has the provider earned more by the way of investment than it expected to earn when it designed the product?
- Has the provider spent more than it allowed to be spent in the design of the product?
- Have termination rates (death, lapse, surrender claim etc) followed expectations?
- Has inflation (and hence expenses and index-linked claim costs) been higher than expected?
Sources of surplus include:
- Mortality
- Morbidity
- Withdrawal/lapses
- New business levels
- Premium/contribution paid
- Investment income and gains
- Claim amounts
- Expenses
- Commission
- Salary growth
- Inflation
- Taxation
Apply – in order to control costs of payments and expenses, management can try to:
• Reduce the likelihood of claims through:
o Periodically reviewing ongoing claims
o Good underwriting of new business
o Good underwriting at claim stage
o Providing customer incentives not to claim
• Reduce claims/benefit amounts by: (variability)
o Using reinsurance to limit the volatility of claims or to protect from the risk of large claims
o Reducing future benefit payments
o Keeping guaranteed benefits to a minimum
o Introducing/ increasing excesses
• Control expenses by:
o Periodically reviewing expenses
o Keeping charges/ premiums flexible
o Ensure that claims expenses are commensurate with the claim size
• Increase the number of policies that renew at the renewal date and/or reduce the number of contracts that lapse
• Follow an investment policy that increases investment returns (subject to an acceptable level of risk)
• Adopt an effective tax management policy
The factors that will affect the amount of surplus distributed by a life insurance company are:
- Provision of capital
- Margins for future adverse experience
- Business objectives of the company and retention of margins
- Policyholder expectations
