Premium liabilities
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The actuary is also required by GPS 210 to provide an opinion on the value of Premiums Liabilities. These are defined as insurance liabilities which relate to claim payments arising from future events insured under existing policies up until their next renewal.
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The general procedures and principles described in the section above for valuing Outstanding Claim Liabilities also apply to valuing Premiums Liabilities. However, it is recognised that, as a full actuarial valuation of Premiums Liabilities is essentially a re-underwriting of the portfolio, it may not be appropriate or even possible to undertake as complete a valuation as is appropriate for Outstanding Claim Liabilities.
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If the premiums charged are based on actuarial advice, it will normally be appropriate to base the central estimate of the Premiums Liability on that advice, modified as appropriate for subsequent information and with current inflation and discount rate assumptions.
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For a reasonably homogeneous and stable portfolio, it will usually be possible to extend the outstanding claim valuation model on the basis of claim frequencies and numbers of policies, or some similar measure of exposure.
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For a relatively stable portfolio, it will often be possible to apply an actuarial loss ratio, based on historical performance as revealed by the outstanding claim estimates, to the unexpired premium. If this, or the approach in paragraph 45 is taken, the actuary should investigate and, if appropriate, adjust the selected assumptions for any:
(a) differences in nature between the unexpired risk exposure and the exposure from which the models and claim experience assumptions developed for the valuation of outstanding claim liabilities were derived;
(b) changes in underwriting standards and premium rates or levels; and
(c) environmental and other differences that might affect the estimated liability.
- In certain cases where premiums charged are not based on actuarial advice, it may not be possible to do more than assume that the premiums charged were appropriate to the risk. In such a case it may be necessary to assume a loss ratio based on subtracting reasonable expense and profit margins. These cases may include, but are not limited to those where:
(a) a large element of underwriting judgement is required in relation to unique risks;
(b) there is little past experience for the class; or
(c) there is insufficient or no information relating to the pricing or underwriting of the risks.
- As a result of these investigations and considerations, the actuary should set out in the report for each class of insurance:
(a) the nature of the unexpired risk exposure relative to recent exposure;
(b) an explanation of the particular difficulties associated with a full valuation or re-underwriting of Premium Liabilities for material classes of business;
(c) a description of the approach adopted in order to reach an opinion on the value of Premiums Liabilities; and
(d) a discussion of the limitations of the approach adopted versus undertaking a full valuation of Premiums Liabilities.
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The complexity of the selected approach should have regard to the materiality and uncertainty of the Premiums Liabilities in the context of the total insurance liabilities for each particular class of business and the insurance liabilities for the company as a whole.
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There should ideally be a high degree of continuity between the following as progressively more information becomes available:
(a) the estimation of Premiums Liabilities;
(b) the estimation of IBNR liabilities; and
(c) the estimation of reported claims.