1. business and industrial
2. company
3. annual report

Financial Condition Report
Concept Paper
Issued on: 24 December 2014
BNM/RH/CP 029-8
Prudential Financial Policy
Department
Concept Paper on Financial Condition Report
TABLE OF CONTENTS
PART A
OVERVIEW ............................................................................................... 1
1
Introduction .................................................................................................... 1
2
Applicability .................................................................................................... 1
3
Legal provisions ............................................................................................. 2
4
Effective date ................................................................................................. 2
5
Related Legal and Policy Documents ............................................................ 2
6
Interpretation .................................................................................................. 3
7
Policy document superseded ......................................................................... 3
PART B
ANALYSES IN THE FCR .......................................................................... 4
8
General requirements .................................................................................... 4
9
Nature of business ......................................................................................... 6
10
Experience analysis ....................................................................................... 6
11
Asset-liability management ............................................................................ 8
12
Capital adequacy and threats to financial condition ....................................... 9
13
Reinsurance or retakaful arrangements ....................................................... 10
14
Distribution of surplus ................................................................................... 11
15
Qard ............................................................................................................. 11
16
Management of estate in participating life business ..................................... 12
PART C
REPORTING ........................................................................................... 13
17
Reporting to the board ................................................................................. 13
18
Reporting to the Bank .................................................................................. 13
APPENDICES ........................................................................................................... 14
APPENDIX 1
POLICY DOCUMENT SUPERSEDED .......................................... 14
APPENDIX 2
GUIDANCE ON CONDUCTING DST ............................................ 15
1
General Procedures ..................................................................................... 15
2
Modelling ...................................................................................................... 16
3
Projection Period .......................................................................................... 17
4
Development of the Base Scenario .............................................................. 18
5
Development of the Adverse Scenarios and Second Order Effects ............. 18
Issued on: 24 December 2014
BNM/RH/CP 029-8
Prudential Financial Policy
Department
Concept Paper on Financial Condition Report
This concept paper (CP) outlines the proposed standards and guidance with respect to
the preparation of the Financial Condition Report (FCR), as set out as one of the duties of
the appointed actuary in the policy document on Appointed Actuary: Appointment and
Duties. The current requirements on the FCR under the Guidelines on Financial Condition
Report (BNM/RH/GL 003-17) (applicable to life insurers) will continue to be in force under
the Financial Services Act 2013 until the proposed standards and guidance in this CP
have been finalised.
This CP seeks to promote a holistic assessment of the threats to an insurer or takaful
operator and the timely presentation of the assessment to the board, in order for the board
to make risk-informed decisions.
The CP also provides principle-based guidance on the use of the Dynamic Solvency Test
(DST) as a tool for assessing the insurer or takaful operator’s financial position.
Key changes from current requirements
When the proposed requirements in the CP are finalised and take effect, they will
supersede the Guidelines on Financial Condition Report (BNM/RH/GL 003-17). This CP
proposes the following enhancements to the expectations relating to the preparation of the
FCR:
1. Further elaboration of the requirements in respect of general insurers and takaful
operators;
2. The requirement for the appointed actuary to present the FCR to the board within 3
months of financial year end;
3. Enhancements arising from updates to the Bank’s requirements on capital adequacy,
takaful operational framework and the management of participating life business; and
4. Revised expectations on the use of the DST as a tool for the appointed actuary to
measure the impact of medium- to long-term risks, which:
 complement shorter-term stress testing requirements, as set out in Guidelines on
Stress Testing for insurers;
 consider the wider impact of financial and non-financial risks beyond the setting of
the Individual Target Capital Level (refer to Guidelines on Internal Capital
Adequacy Assessment Process (ICAAP) for insurers ); and
 provide flexibility for the appointed actuary to apply his judgment on the
parameters used.
Issued on: 24 December 2014
BNM/RH/CP 029-8
Prudential Financial Policy
Department
Concept Paper on Financial Condition Report
The Bank invites written comments on this CP. Please support each comment with a clear
rationale, accompanying evidence or illustration, as appropriate. In addition, all insurers
and takaful operators are invited to respond to the specific questions set out in this CP.
Responses must be submitted by 27 February 2015 to:
Pengarah
Jabatan Dasar Kewangan Pruden
Bank Negara Malaysia
Jalan Dato' Onn
50480 Kuala Lumpur
Email: [email protected]
Issued on: 24 December 2014
BNM/RH/CP 029-8
PART A
Prudential Financial Policy
Department
Concept Paper on Financial
Condition Report
1/19
OVERVIEW
1
Introduction
1.1
Policy Objective
This policy document outlines standards and guidance on the preparation of
the Financial Condition Report (FCR), being one of the appointed actuary’s
duties specified in paragraph 9.1(b) of the policy document on Appointed
Actuary: Appointment and Duties and the policy document on Appointed
Actuary: Appointment and Duties (for reinsurers and retakaful operators).
The FCR provides the appointed actuary’s overall investigation results,
assessments, independent opinions and recommendations to the board on
various aspects of the licensed person’s financial condition, including any
significant threats to the financial condition of the licensed person and
potential mitigation measures for such threats.
1.2
Scope of Policy
This policy document sets out(i)
minimum areas of analyses that need to be considered by the
appointed actuary in preparing the FCR;
(ii)
minimum reporting time frame for presentation of the FCR to the board
and submission to the Bank; and
(iii)
guidance on conducting the Dynamic Solvency Test (DST).
2
Applicability
2.1
This policy document applies to the appointed actuary of(i)
insurers licensed under the Financial Services Act 2013 (FSA); and
(ii)
takaful operators licensed under the Islamic Financial Services Act
2013 (IFSA).
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Legal provisions
3.1
The requirements in this policy document are specified pursuant to:
(i)
sections 47(1), 76 and 143 of the FSA; and
(ii)
sections 57(1), 85 and 155 of IFSA.
4
Effective date
4.1
This policy document takes effect(i)
2/19
for a licensed person whose financial year commences on 1 January,
on and from 1 January 2015 in respect of its FCR prepared for 2015
and thereafter, for subsequent financial years; and
(ii)
for a licensed person whose financial year commences other than on 1
January, on and from the commencement date of its financial year in
2015 in respect of its FCR prepared for 2015 and thereafter, for
subsequent financial years.
S
5
Related Legal and Policy Documents
5.1
This policy document must be read together with the following policy
documents as may be amended by the Bank from time to time:
(i)
Appointed Actuary: Appointment and Duties;
(ii)
Appointed Actuary: Appointment and Duties (for reinsurers and
retakaful operators;
(iii)
Risk-Based Capital Framework for Insurers;
(iv) Management of Participating Life Policy Business;
(v)
Guidelines on Takaful Operational Framework; and
(vi) Financial Reporting for Takaful Operators.
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6
Interpretation
6.1
The terms and expressions used in this policy document shall have the same
meanings assigned to them in the FSA and IFSA unless otherwise defined in
this document.
S
6.2
For the purposes of this policy document:
„‟S‟‟ denotes a standard, requirement or specification that must be complied
with. Failure to comply may result in one or more enforcement actions;
„‟G‟‟ denotes guidance which may consist of such information, advice or
recommendation intended to promote common understanding and sound
industry practices which are encouraged to be adopted.
“board” means the board of directors of a licensed person, or a committee of
the board where the responsibilities of the board set out in this policy
document have been delegated to such committee.
“licensed person” collectively refers to a licensed insurer and licensed
takaful operator, unless otherwise specified.
“senior management” refers to the chief executive officer and senior
officers of a licensed person.
7
Policy documents superseded
7.1
The policy documents listed in Appendix 1 will be superseded by this policy
document when it takes effect as set out in paragraph 4.1.
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BNM/RH/CP 029-8
PART B
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ANALYSES IN THE FCR
8
General requirements
8.1
The FCR serves to provide the board with critical insights into the
developments of a licensed person’s risk profile and the options available to
mitigate identified threats to the licensed person’s financial condition. As
such, an appointed actuary must provide in the FCR, the results of his overall
investigations into the licensed person’s financial condition by addressing the
following areas:
(i)
the licensed person’s current and expected future financial condition;
(ii)
significant risks and threats to the licensed person’s current and
expected future financial condition;
(iii)
options and recommendations proposed to the board to mitigate such
risks and threats;
(iv) actions taken by senior management in response to recommendations
in previous FCRs, as well as the extent to which these actions have
effectively addressed the concerns; and
(v)
any
other
significant
findings
from
the
appointed
actuary’s
investigations.
S
8.2
In order to support the results of the overall investigations referred to in
paragraph 8.1, the appointed actuary must include in the FCR his
assessments and independent opinions, with recommendations where
relevant, on key areas impacting the risk profile of the licensed person. These
key areas must include the licensed person’s:
(i)
nature of business;
(ii)
experience analysis;
(iii)
asset-liability management;
(iv) capital adequacy and threats to its financial condition;
(v)
reinsurance or retakaful arrangements;
(vi) qard in respect of a takaful operator;
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(vii) distribution of surplus; and
(viii) management of estate in participating life business.
S
8.3
The appointed actuary must include other areas not specified in paragraph
8.2 in his assessment if, in the appointed actuary’s professional opinion, such
areas are relevant to the licensed person’s financial condition and are
necessary in providing the board with a complete understanding of the
licensed person’s financial condition.
S
8.4
As required under paragraph 9.11 of the policy document on Appointed
Actuary: Appointment and Duties, the appointed actuary must, in the FCR,
also inform the board of all factors, including any significant limitations
identified in the course of verification performed by the appointed actuary 1
that may have affected the results of his assessments. These factors may
include:
(i)
the
credibility,
accuracy
and
completeness
of
data
used
for
investigations;
(ii)
limitations of information systems or any models used for investigations;
(iii)
availability of resources;
(iv) any reliance placed on input from other parties; and
(v)
any actual or potential conflict of interest in the preparation of the FCR,
such as where the appointed actuary holds other positions of
responsibility in the licensed person2, and how the conflict has been
resolved or avoided.
1
2
As required in paragraph 9.1(d) of the policy document on Appointed Actuary: Appointment and
Duties, the appointed actuary must apply the appropriate tests to reasonably satisfy himself of the
completeness and accuracy of the current database of business used in preparing the FCR.
As required in paragraph 9.8 of the policy document on Appointed Actuary: Appointment and
Duties, the appointed actuary must have taken reasonable steps to avoid actual and potential
conflicts of interest in the course of carrying out his duties.
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9
Nature of business
9.1
In the FCR, the appointed actuary must make an assessment and provide his
opinion on the impact of the current and emerging nature of the licensed
person’s business on its risk profile. In his assessment, the appointed actuary
must consider the following:
(i)
business in force and new business volumes for each insurance or
takaful fund;
(ii)
new products and revisions to existing products, including significant
risks to the financial soundness of the licensed person arising from such
products;
(iii)
changes to the licensed person’s distribution strategy, underwriting
standards and investment strategy;
(iv) external factors, including economic, legal and regulatory, social,
demographic and consumer behavioural factors;
(v)
for takaful business, any impact arising from the implementation of or
changes made to the operational model of the takaful business; and
(vi) any other relevant areas relating to the nature of the licensed person’s
business.
10
S
Experience analysis
10.1 The appointed actuary must provide an experience analysis in the FCR,
together with his opinion on:
(i)
the appropriateness of best estimate assumptions previously set;
(ii)
significant trends, if any, in the actual experience over the past years;
(iii)
deviations in actual experience from the previous best estimate
assumptions; and
(iv) the underlying reasons for any material deviations of actual experience
from the previous best estimate assumptions.
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10.2 The experience analysis for all insurance or takaful funds by the appointed
actuary must take into consideration the key risk drivers of the business,
including all related expenses.
G
10.3 For life business and family takaful business, the key risk drivers should
include:
(i)
mortality;
(ii)
morbidity;
(iii)
persistency; and
(iv) investment returns.
G
10.4 For general business and general takaful business, the experience analysis
by the appointed actuary may also include the investigation of changes in
exposure and patterns or trends in claims. Key risk drivers should be
analysed at an appropriate level of granularity. This should include an
analysis based on:
(i)
class of business (for example, motor, fire, residential or commercial
risks);
S
(ii)
claim types (for example, property damage or liability claims);
(iii)
geographical location; and
(iv)
year of origin (for example, the underwriting year or accident year).
10.5 In
8 relation to the analyses of expenses in paragraph 10.2, the appointed
actuary must provide an assessment of the level of expense overruns and
any anticipated expense overruns. The related expenses must be categorised
(as applicable) by:
(i)
fund;
(ii)
line of business;
(iii)
initial and renewal business;
(iv) direct and indirect expenses; and
(v)
allocated and unallocated loss adjustment expenses.
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10.6 Based
8
on the experience analysis for life business and family takaful
business, the appointed actuary must provide an assessment of the surplus
arising for each source of surplus in each insurance or takaful fund, to
demonstrate the financial impact of the deviations between assumptions
previously set and actual experience.
S
10.7 The appointed actuary must also include an opinion on product pricing in the
FCR, as required in paragraph 9.9 of the policy document on Appointed
Actuary: Appointment and Duties.
S
10.8 For investment-linked insurance and takaful business, the appointed
actuary’s opinion on product pricing must address the long-term sustainability
of policy owner or participant unit account to meet future costs of insurance or
tabarru charges and other relevant charges and fees imposed.
G
10.9 The appointed actuary should consider the following factors which may lead
to non-sustainability of unit account resulting in possible early termination of
investment-linked insurance and takaful policy ahead of the maturity date:
(i)
inadequate controls leading to inappropriate pricing for additional
benefits such as not charging additional premiums when it is necessary;
(ii)
prolonged poor investment performance of the unit fund;
(iii)
significant partial withdrawals and premium holidays; and
(iv) revisions to the cost of insurance or tabarru changes due to poor claims
experience, as well as any revisions to other fees and charges imposed
by the insurer and takaful operator from time to time, without
corresponding increase in premium or contribution amounts.
11
S
Asset-liability management
11.1 In the FCR, the appointed actuary must provide an assessment and provide
an opinion on the appropriateness of the licensed person’s overall investment
policy and asset-liability management policy, taking into account the liability
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Condition Report
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profile and risk appetite of the licensed person.
S
11.2 The appointed actuary’s assessment for purposes of paragraph 11.1 must
consider the following areas:
(i)
the strategic asset allocation and tactical asset allocation of each fund,
including specific investment strategies for any products with unique
features;
(ii)
the characteristics of the licensed person’s liability cashflows, including
the nature, term, currency, amount and timing of such cashflows;
(iii)
any options and guarantees in the licensed person’s product features;
(iv)
for participating life business, the manner in which policyholders’
reasonable expectations are managed and their impact on bonus
revisions;
(v)
the effectiveness of specific risk mitigation measures taken by the
licensed person (for example, hedging or reinsurance arrangements);
(vi)
key risks arising from any mismatches between the licensed person’s
investment strategy and the characteristics of its liability cashflows; and
(vii) the availability and adequacy of surplus capital in the respective
insurance or takaful funds to withstand such mismatched risks.
12
S
Capital adequacy and threats to financial condition
12.1 The appointed actuary must provide in the FCR, an opinion on the
adequacy of the licensed person’s capital position. In providing this opinion,
the appointed actuary must conduct a DST and take into consideration the
results of the DST as well as the impact of any significant movements of its
Capital Adequacy Ratio (CAR) over the past financial year.
S
12.2 For the purposes of his opinion referred to in paragraph 12.1, the appointed
actuary must identify significant threats to the licensed person’s financial
condition, based on his understanding of the licensed person’s business
profile, covering both financial and non-financial risks.
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12.3 For financial risks, the appointed actuary must use the DST as a tool to
demonstrate the impact of such risks to the licensed person’s financial
condition. For non-financial risks, the appointed actuary must use his
judgement to determine whether the impacts of such risks are best
demonstrated through the DST or through alternative approaches.
S
12.4 The results of the DST must be appended with the FCR to support the
appointed actuary’s opinion on the adequacy of the licensed person’s capital
position over the projection period of the DST, and any recommendations
for senior management’s action.
G
12.5 Guidance for conducting the DST is set out in Appendix 2.
13
S
Reinsurance or retakaful arrangements
13.1 The appointed actuary must provide an assessment and his opinion in the
FCR on the overall suitability of the licensed person’s reinsurance or
retakaful arrangements in relation to its liabilities.
S
13.2 In undertaking the assessment of reinsurance or retakaful arrangements
under paragraph 13.1, the appointed actuary must consider the following
areas:
(i)
the appropriateness of the reinsurance or retakaful arrangements with
respect to the relevant product lines;
(ii)
the financial position of the reinsurer or retakaful operator;
(iii)
the appropriateness of the level of retention of risks;
(iv)
an assessment of the credit risk and any concentration risks arising
from the reinsurance or retakaful arrangements, especially where such
arrangements are made with related companies; and
(v)
the insurer’s ability for claim recovery under a reinsurance or retakaful
contract, taking into account legal opinions provided, if any.
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Distribution of surplus
14.1 The appointed actuary must include in the FCR his recommendations to the
board on the distribution of surplus as specified in the policy document on
Appointed Actuary: Appointment and Duties.
S
14.2 For licensed life insurers carrying on participating life business, the
appointed actuary must append the results from the annual bonus
recommendation report as required in the policy document on Management
of Participating Life Policy Business.
S
14.3 For licensed takaful operators, the appointed actuary’s recommendation on
the distribution of surplus from the Participants’ Risk Fund (PRF) must
include an elaboration of:
(i)
the different types of distribution made and the rationale for the amount
recommended for distribution;
(ii)
the impact of the distribution on the financial position of the takaful
funds;
(iii)
the methods used in determining the distribution (for example, whether
differentiated by product lines or cohorts of participants); and
(iv) the amount of surplus retained in the PRF and the factors considered
in determining the amount.
15
S
Qard
15.1 For licensed takaful operators, the appointed actuary must provide an
assessment and opinion in the FCR:
(i)
on the repayment of qard to the licensed takaful operator in the case of
qard provided to rectify a previous deficit in the PRF; or
(ii)
the possibility of the PRF requiring qard in the future, taking into
account the results of the DST, irrespective of whether qard has been
provided to rectify deficit.
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15.2 The appointed actuary’s assessment in paragraph 15.1 must include an
elaboration on:
(i)
the causes of the deficit in the PRF or sub-funds;
(ii)
the impact of the qard given and repayment of the qard on the financial
position of the licensed takaful operators or PRF; and
(iii)
the ability of the PRF to repay qard to the licensed takaful operator
where there is qard outstanding in the PRF, including circumstances in
which qard is deemed irrecoverable3.
16
S
16.1
Management of estate in participating life business
For licensed life insurers carrying on participating life business, the
appointed actuary must provide an opinion in the FCR on the overall
suitability of the use of estates, taking into account the requirements in the
policy document on Management of Participating Life Policy Business.
3
Such assessment should take into account requirements in the Guidelines on Takaful Operational
Framework and Financial Reporting for Takaful Operators.
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PART C
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REPORTING
Reporting to the board
17.1 The appointed actuary must present the FCR to the board no later than
three (3) months after the end of each financial year.
Question 1:
The Bank would like to request the board to provide details on how the FCR is
currently used in business and capital planning etc.
Question 2:
The Bank would like to request the board to comment on any constraints faced by
the board in its deliberation of the FCR.
18
S
Reporting to the Bank
18.1 The FCR must be submitted to the Bank no later than three (3) months after
the end of each financial year.
S
18.2 Any documentation supporting the FCR but which is not included as part of
the FCR must be made available to the Bank for inspection upon request.
The requirement of a shorter time frame for reporting to the board of 3 months
(reduced from 6 months) is intended to facilitate timely and effective identification
of risks with sufficient time to implement the necessary mitigating measures.
Question 3:
Please comment on any specific operational challenges that your insurer would
face in complying with the 3-month reporting requirement, and the expected time
required to address these challenges prior to the effective date of compliance.
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APPENDICES
Appendix 1
Policy document superseded
1. Financial Condition Report (BNM/RH/GL 003-17) issued on 11 August 2007
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BNM/RH/CP 029-8
Appendix 2
Prudential Financial Policy
Department
15/19
Guidance on conducting DST
1
General Procedures
1.1
The DST:
(i)
Concept Paper on Financial
Condition Report
projects the financial position of a licensed person into the future,
allowing for variations in both the experience of the licensed person
and the external economic environment; and
(ii)
allows identification of significant risks and the assessment of possible
risk mitigation measures.
1.2
The DST should cover the following:
(i)
a review of the recent and current financial position of the licensed
person in respect of (a)
an analysis of trends in its financial statements;
(b)
investigations
into
the
circumstances
and
key
factors
contributing to those trends; and
(c)
a comparison of the previous year’s DST projections against
recent actual experience to validate whether any previously
selected base and/or adverse scenarios are emerging;
(ii)
development of the base scenario based on projection of the licensed
person’s business plan under the assumptions representing the best
estimate of the future experience, the licensed person’s actual
experience and the external economic environment;
(iii)
development of adverse scenarios based on the identified risk
categories and analysis of their impact; and
(iv)
identification and assessment of possible risk mitigation measures and
modelling of such measures, where possible, to provide an
assessment of their effectiveness.
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2
Modelling
2.1
The DST projection model should reproduce key elements from the balance
sheet, revenue account and capital adequacy measures for the period of the
projection. These elements should be consistent with one another and from
year to year.
2.2
The projection model may be deterministic or stochastic or a combination of
both. The types of model should be selected based on the risk to be
modelled and the availability of reliable stochastic models for that area.
2.3
Where stochastic models are used, care should be taken to ensure:
(i)
the
calibration time period encompasses periods
of
adverse
experience;
(ii)
proper fit of assumed distribution to the modelled phenomena; and
(iii)
results are checked using reasonableness tests and supported with
qualitative assessments.
2.4
Some tests for the accuracy and reasonableness of the model should
include:
(i)
projection based on an earlier year’s position to the most recent
financial year end and comparison with the latest annual statement;
and
(ii)
reasonableness checks on the relativities of the model’s output under
various scenarios.
2.5
Comments on the level of model risk and how this has been accounted for
in the projections. Models used should be fit for their purpose.
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Projection Period
3.1
The choice of the projection period should consider the following:
(i)
17/19
the projection period should be sufficiently long to model and capture
the effect of adverse trends in experience and the time taken for the
risk mitigation measures to be put in place; and
(ii)
the projection period should be sufficiently short to maintain the
confidence in the assumptions for the projection, including those
provided by other professionals involved in the DST exercise.
3.2
An example for paragraph 3.1(i) is the deterioration of mortality experience
which may take at least two to three years for the trend to be recognised,
and the implementation of a new premium scale as a mitigation measure
may not be feasible immediately due to other factors, such as the
consistency with the type of products the licensed person sells and the
product cycle4 for these products.
3.3
Significant impact of adverse events, including second order effects, should
not be overlooked in the projection just because they fall outside the typical
business planning period.
3.4
The availability of key data required throughout the projection is an
important consideration. Any assumptions made in the absence of the data
should be clearly documented and its impact explained.
3.5
The projection period for life insurers and family takaful operators may
typically lie between 5 and 6 years, while for general insurers and general
takaful operators the projection period may typically be between 3 and 4
years.
4
Product cycle refers to the period before major changes are made to a product.
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4
Development of the Base Scenario
4.1
The assumptions used for the base scenario should generally be consistent
with the assumptions used for the business plan of the licensed person. Any
differences should be identified and explained. The differences may arise
due to various reasons, for example:
(i)
an event that occurred which was not captured by the business plan;
or
(ii)
differences in opinion between the appointed actuary and the business
plan assumptions.
4.2
All underlying elements of the base scenario should be consistent. For
example, if the projection assumes rapid expansion of the licensed person’s
business, the costs involved, such as additional capital requirements, staff
recruitment, expansion of distribution channels, development of systems
and infrastructure should be accounted for.
4.3
In developing the base scenario, there may be reliance on estimates
provided by other specialists within the licensed person. It is important that
the appointed actuary understands the process behind the derivation of
these estimates and applies a reasonableness test on the projection result.
5
Development of the Adverse Scenarios and Second Order Effects
5.1
Adverse scenarios should be developed through determination of risk
categories that are relevant to the licensed person.
5.2
The determination of the severity of the adverse scenarios should take into
account the actual experience and assumptions relative to the base
scenario.
Issued on: 24 December 2014
BNM/RH/CP 029-8
5.3
Prudential Financial Policy
Department
Concept Paper on Financial
Condition Report
19/19
The adverse scenarios should incorporate second order effects that may
arise due to changes in one or more interdependent risk factors. The
second order effects are spill over effects that may arise due to the original
adverse scenario which may also have further adverse impact on the
licensed person’s financial condition.
5.4
A distinction should be drawn between adverse scenarios which test:
(i)
the impact of deterioration in experience leading to a revision in the
long term best estimate and valuation assumptions;
(ii)
the impact of deterioration in experience without a change in the long
term best estimate and valuation assumptions; and
(iii)
5.5
the impact of a change in the valuation assumptions.
The adverse scenarios should be realistic to ensure the integrity of the DST
results. For example, in the adverse scenario of deterioration in mortality
experience, it may be unrealistic to revise the valuation assumption
immediately in the first projection year, as the experience has not fully
developed yet. A more realistic approach would be to model several years
of poor mortality experience, which eventually settles at a ‘long term best
estimate’ assumption in the final projection year. Under this approach, the
valuation assumption is only revised in the final year.
5.6
Risk mitigation measures in response to adverse scenarios should be
highlighted and modelled in the DST projection, where possible. The results
should be considered with and without modelled risk mitigation measures to
assess the effectiveness of such measures. In addition, the inclusion of risk
mitigation measures should take into account any practical (including legal
and operational) constraints on the ability of the insurer to implement such
measures. Examples of risk mitigation measures include discontinuance of
a product line, capital injection, bonus revisions, and increases in premium
rates.
Issued on: 24 December 2014