runoff basis

Discussion in 'SA3' started by Gousgounis, Sep 20, 2007.

  1. Gousgounis

    Gousgounis Member

    In Assignment Q2.1 under a recommended statutory valuation of liabilities the solution says that the UPR should be valued under a wind-up basis- i.e. gross of DAC. Shouldn't it be valued under a runoff basis i.e. net of DAC ?

    Also, what is the impact of producing the statutory returns under a runoff basis (rather than ongoing basis)?

    Thanks!
     
    Gousgounis, Sep 20, 2007
    #1
  2. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    The paragraph at the bottom of page 2 of the solutions sums it up.

    If the company is being valued on an on-going basis, it would best to use net of DAC, but if using a wind-up basis, gross of DAC would be suitable, unless there is some commission clawback arrangement.

    This is also mentioned in the Subject ST3 course notes somewhere, if I remember rightly!

    Depends on what you're trying to 'prove', as to which basis you use. If you want to show solvency if the company ceased trading altogether, then use a wind-up basis and choose suitable assumptions. If you want to show solvency if the company closed to new business, then use a run-off basis and choose other assumptions.
     
    Last edited: Sep 24, 2007
    Ian Senator, Sep 24, 2007
    #2
  3. Gousgounis

    Gousgounis Member

    Thanks for the reply.

    My understanding is that the statutory returns are required to be produced on a runoff basis. So you don't have the option of producing the returns on a break-up basis. Isn't that right?

    What are examples of suitable assumptions for a runoff basis?
     
    Gousgounis, Sep 25, 2007
    #3
  4. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    That's right, Statutory Returns in the UK are on a run-off basis (but note the question is not UK-specific in this instance).

    In a run-off basis, think about how the situation differs from an ongoing company. So for example:

    Investment starts getting restricted, so less investment income.
    Expenses get spread over fewer and fewer policies, so your expense assumptions will change.
    Premiums will obviously decrease (and eventually disappear!).
    etc.
     
    Ian Senator, Sep 26, 2007
    #4

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