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Financial reporting for life insurance companies

Financial reporting for life insurance companies. Ron Hersmis AAG Dubrovnik, Croatia, 22 April 2004. Biography. Ron Hersmis AAG, Aktuar (DAV) board member Het Actuarieel Genootschap/Actuarieel Instituut member Education Committee Groupe Consultatif and IAA. Purpose of reporting.

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Financial reporting for life insurance companies

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  1. Financial reporting for life insurance companies Ron Hersmis AAG Dubrovnik, Croatia, 22 April 2004

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

  3. 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)

  4. For whom? • Supervisory authority • Tax office • Share holders • Policy holders

  5. 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)

  6. Balance sheet

  7. Balance sheet ?! ?! ?! ?! ?!

  8. Profit and loss account

  9. Profit and loss account ?! ?! ?! ?!

  10. 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)

  11. 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

  12. 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

  13. Assets – fixed interest • How to valuate in the balance sheet? (historical value, amortized value) • How to present (un)realised gains? Different possible methods!

  14. 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

  15. 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

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

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

  18. 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

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

  20. 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

  21. 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

  22. 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

  23. Thank you for your attention!

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