Valuing liabilities

reasons for calculating provisions (BAD MEDICS)

definitions

individual provisions

global provisions

best estimate

cautious basis

optimistic basis

factors affecting the basis used for different provisioning purposes/clients

factors to consider when valuing options and guarantees

assumptions that have equal probability of overstating or understating the value of the assets and liabilities

assumptions are chosen which result in a high value of assets and/or a low value of liabilities

assumptions are chosen which result in a low value of assets and/or a high value of liabilities

cannot be allocated to individual contracts or members and relate to a provider's liabilities as a whole

relate to an individual contract or scheme member.

internal accounts

best estimate- to give a realistic picture for decision-making by management

discontinuance benefits

best estimate- for fairness between those discontinuing, those remaining and the provider

discretionary benefits

cautious- awarding discretionary benefits will dilute the security of the existing benefits. Important not to overstate surplus available

generally, cautious

unless all guarantees are in the money, assuming the worst case scenario in every case can build in too much caution

hence,, guarantees may be assessed on a global basis

stochastic model should be used to show likelihood of guarantee biting and the associated expected cost. Parameter values should reflect the purpose for which the results are required.

guarantees become more or less onerous over time

influences on consumer behaviour will vary widely according to economic scenarios and the sophistication of the market

options- allow for anti-selection risk when valuing options or mitigate this risk using eligibility criteria for exercising the option.

option take up affected by...

cultural bias e.g PCLS in the UK

state of the economy

demographic factors

consumer sophistication