Meauring Solvency

[Avviey]

Hi,

For Chapter 16, section 3:

There are two main ways to measure the values of assets and liabilities for solvency, one is supervisory values and the other is expected values. I'm wondering the how the values differ from each other? Would the supervisory basis more prudent as such that it includes margins as well?

Many thanks if someone can help.

 

[fischer]

Yes, that's my understanding as well.

Supervisory reserves - calculated on a prudent basis. This is (usually) a regulatory requirement. It will include margins within the assumptions and/ or the RDR. It could also inlude additional capital over and above the required calculated reserves. This additional capital held could be:
- a mismatch reserve
- a solvency capital requirement
- or other
Any difference between the actual and expected will be absorbed by the margins first and then by the additional capital requirements.
The main aim of the supervisory reserves is to ensure that the insurer is able to meet liabilities even if the actual experience is not as expected.
I think that:
Probability of overstating liabs must be more than 50% &
Probability of overstating assets must be less than 50%

Realistic reserves - The expected values - is reserving done on a best estimate basis. It is done on a more realistic basis. The main purpose of this is to provide management with info on the realistic solvency position of the company.
For example: management will decide mergers & acquisitions/ takeovers based on the results from the realistic valuation.
I don't think it would include margins.
Probability of over/ understating assets/liabs must be 50%.

I know examiners don't like us moving away from the bookwork and into actual office experience, but this is similar to the Peak1 and Peak2 valuations that most insurers carry out.

Hope it makes sense.

Cheers

 

[Avviey]

Thanks very much, Fischer.