Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005)
3The Principles of the Valuation
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Turn the raw legal text into a practical explanation grounded in Record of resolutions of the Life Insurance Actuarial Standards Board: actuarial standards - incorporating actuarial standards 1.04, 2.04, 3.04, 6.03 and 7.02 (05/12/2005).
SECTION 3 The Principles of the Valuation
Overview
The purpose of this part of the standard in prescribing a set of principles for the valuation of the policy liabilities in respect of life insurance contracts is to achieve the two essential objectives of:
determining, as at the reporting date, a realistic determination of the policy liabilities of the company in respect of Life Insurance Contracts; and
providing for the emergence of profit in respect of Life Insurance Contracts as it is earned.
The Best Estimate Liability
The first of these objectives may be met by determining a best estimate value of the liabilities being the value of the expected future contractual payments to policy owners on the basis of best estimates of future income and outgo.
The Profits
The second of these objectives may be met by determining a best estimate value of the expected future profits to emerge under the policies. The explicit provision for future profits, through Bonuses and/or Profit Margins, is a mechanism to facilitate the release of profit as it is earned through the provision of services and the receipt of the related income.
The sum of the Best Estimate Liability and the value of the expected future profits is called the Policy Liability.
It is not the purpose of this Standard to prescribe a single methodology for the valuation of policy liabilities in respect of Life Insurance Contracts. The principles of the Standard will normally be achieved by adopting a projection methodology. However, it is recognised that alternative approaches - such as an accumulation methodology - may in some cases be appropriate in achieving the principles.
3.1 It is the principles which are paramount in determining the Policy Liability; methodology is incidental to the principles. Projection or accumulation methodologies may be appropriate provided the Actuary can demonstrate that the principles have been met.
3.2 The Policy Liability must provide for both:
- a best estimate value of the liability of the company in respect of obligations under Life Insurance Contracts; and
- a uniform emergence of profit in respect of Life Insurance Contracts relative to one or more appropriate Profit Carriers.
3.3 While Profit Carriers are an explicit component of the valuation where a projection approach is used, the Profit Carriers are implicit where an accumulation approach is appropriately used.
3.4 The profit emerging in the reporting period must recognise both:
- the expected profits for the period; and
- the Experience Profit for the period.