Financial reporting for life insurance companies

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Financial reporting for life insurance companies

• Ron Hersmis AAG
• Dubrovnik, Croatia, 22 April 2004

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Biography

• Ron Hersmis AAG, Aktuar (DAV)
• board member Het Actuarieel Genootschap/Actuarieel
  Instituut
• member Education Committee Groupe Consultatif and
  IAA

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Purpose of reporting

• Giving a proper insight of the financial
  situation of an insurance company
• Equity capital (shareholder value)
• Profits and losses (profitability)
• Insight in the financial risks (solvency)

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For whom?

• Supervisory authority
• Tax office
• Share holders
• Policy holders

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Questions?

• Presentation of figures marketing or reporting?
  (window dressing, dividend policy, tax
  planning)
• As transparant as possible or as prudent as
  possible (volatility vs smoothing)

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Balance sheet
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Balance sheet
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Profit and loss account
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Profit and loss account
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Solvency margin

• According to existing directive
• Percentage of math res
• Permillage of sum at risk
• Reduction factor because of reinsurance
• A prudent reserve leads to a high solvancy margin
  (independent of mortality rates, reservering
  method, interest rate etc)

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Mathematical Reserve

• Reserving method (Net reserve, Zillmer, Höckner)
• Interest rate
• Mortality tables
• Age adjustments
• Guarantees
• Embedded options
• Disability/recovery
• The responsible actuary can influence the results
  heavily

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Assets - equities

• How to valuate equities on the balance sheet
• How are trade profits presented in the P/L
• Directly
• In future years (scenario?)
• In the Netherlands, as in other countries there
  is variety in valuating equities

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Assets fixed interest

• How to valuate in the balance sheet? (historical
  value, amortized value)
• How to present (un)realised gains?
• Different possible methods!

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Assets real estate

• Which value in the balance sheet?
• Purchase value
• Actual value (regular evaluation)
• Any other value (symbolic value)
• When under valuated hidden reserves

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Investment returns

• Realised and unrealised gains
• Difference between categories in regulations
• Activated interest rate discount
• Proper asset allocation between subsidiaries
• Depending on valuation principles different
  companies can have different investment returns

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Expenses

• Direct vs indirect costs
• Fixed vs variable costs
• First costs vs renewal costs
• Deferring acquistion costs which scheme for
  writing off?

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Accounting principles

• In the late 60s the process for developing
  accounting standards started.
• Generally accepted
• Transparent
• Making (life insurance) companies comparable

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Life insurance companies

• Obscurities for non experts
• Calculation of provisions
• Net reserving method (new business strain)
• Deferred acquistion costs
• Intrest rate discount (Dutch profit sharing)
• Return on investments

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Transparancy

• Now As many accounting principles as companies
• Future Uniformity in valuation principles
• Result Making life insurance companies comparable

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IFRS

• One standard for all insurance companies
• All assets and liabilities valued on a fair value
  basis (results matching is not allowed anymore)
• Transparancy inspire confidence to share holders
• Volatility disadvantage according some companies

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Main items

• How to valuate so-called embedded options? (risk
  neutral, deflators)
• Fair value of the liabilities is a best estimate
  with a market value margin (spot yields,
  replicating portfolios)
• Determination calculation methods for the best
  estimate and the MVM is high qualified actuarial
  work

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To discuss

• Is fair value fair?
• Actuaries are not educated well enough to perform
  stochastic calculations, additional training is
  needed
• IFRS gives actuaries the opportunity to improve
  their position as authorative professionals on
  fair value valuation

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Thank you for your attention!