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ICSNEWLevel 1 and Level 2 texts3. Market-Adjusted Valuation3.2 Current Estimate

3.2 Current Estimate

3.2.1 Basis for calculation

  • L1-18. The current estimate corresponds to the probability-weighted average of the present values of the future cash flows associated with insurance liabilities, discounted using the yield curve relevant for the currency and bucket of each liability. The three buckets to which liabilities can be allocated are described in section 3.2.5.3.
  • L1-19. The current estimate does not include any implicit or explicit margins.
  • L1-20. Reinsurance recoverables are calculated in a way that is consistent with the current estimates of insurance liabilities, based on the same assumptions and inputs.
  • L1-21. When valuing insurance liabilities, no adjustment is made to take into account the IAIG’s own credit standing.
  • L1-22. More details on how to project cash flows for the current estimate calculation are provided in the Level 2 text.

3.2.1.1 General considerations

  • L2-17. The current estimate calculation is based on the probability weighted average of the future cash flows, taking into account the uncertainty relating to:
    • a. The timing, frequency and severity of claim events;
    • b. Claim amounts and claim inflation, including where relevant any uncertainty on the value of indices used to determine claim amounts;
    • c. The time needed to settle claims;
    • d. The amount of expenses; and
    • e. Policyholder behaviour.
  • L2-18. Cash flow projections reflect expected future demographic, legal, medical, technological, social or economic developments, and are based on appropriate inflation assumptions, recognising the different types of inflation to which the entity can be exposed. Premium adjustment clauses are also considered, where relevant.
  • L2-19. The current estimate is calculated gross of reinsurance and special purpose vehicles (SPV). Recoverables from reinsurance or SPVs are calculated separately and recognised as an asset.
  • L2-20. The projected cash flows include at a minimum the following items within the contract boundaries:
    • a. Benefit and claim payments;
    • b. Direct and indirect expenses incurred;
    • c. Premiums received;
    • d. Subrogation payments and recoveries other than from reinsurance and special purpose vehicles; and
    • e. Other payments made in order to settle the claims.
  • L2-21. All expenses related to existing contracts and contracts that are recognised at the reporting date, but not yet in force, are included in the current estimate calculation. The expenses estimation assumes that the IAIG will write business in the future. Future expenses relating exclusively to future business are not considered for the current estimate calculation.
  • L2-22. Where a yield curve is needed as input to assess future returns on assets, the IAIG makes use of the relevant IAIS yield curves with specified adjustments.

3.2.1.2 Options and guarantees

  • L2-23. The expected cash flows relating to options and guarantees embedded in the insurance contract are taken into account for the calculation of the current estimate. All payments connected to the risks insured, and profit participation payments in particular, are taken into consideration for the calculation of the value of options and guarantees.
  • L2-24. All options and guarantees are valued using arbitrage-free techniques6 based on the adjusted yield curve as a proxy for the risk-free curve.

3.2.1.3 Policyholder behaviour

  • L2-25. Where relevant, expected cash flows reflect the contractual right of policyholders to change the amount, timing or nature of their benefits.
  • L2-26. The likelihood that policyholders will exercise contractual options, including lapses and surrenders, is taken into account with a prospective view, considering in particular:
    • a. Past and expected behaviour of policyholders, considering also their reaction to management actions;
    • b. How beneficial the exercise of options would be to policyholders under specific circumstances; and
    • c. Economic conditions.
  • L2-27. To the extent that it is deemed representative of future expected behaviour, assumptions on policyholder behaviour are based on appropriate statistical and empirical evidence.
  • L2-28. The assumptions concerning policyholder behaviour are consistent with the assumed investment returns and the yield curves used for discounting insurance liabilities.

3.2.1.4 Future discretionary benefits

  • L2-29. Future discretionary benefits (FDB) are comprised of all non-guaranteed amounts, including those bonuses linked to a legal or contractual obligation to distribute a portion of the IAIG’s financial/underwriting profits to policyholders.
  • L2-30. The current estimate recognises FDB expected to be paid consistently with expected future developments, the economic scenarios on which the liability valuation is based and policyholders’ reasonable expectations.
  • L2-31. The projection of FDB is also consistent with the yield curve applicable to the contract, as well as with the modelling of policyholder behaviour as described in section 3.2.1.3.

3.2.2 Contract recognition, contract boundaries and time horizon

  • L1-23. A contract is recognised when the IAIG becomes a party to that contact, until all obligations related to that contract are extinguished. All contracts that are recognised at the valuation date, and only those, are taken into account for the current estimate calculation.
  • L1-24. The future premiums and associated claims and expenses linked to those recognised contracts are taken into account up to each contract boundary.
  • L1-25. The projection horizon used in the calculation of the current estimate covers the full lifetime of all the cash in- and out-flows required to settle the obligations (within contract boundaries) related to recognised insurance and reinsurance contracts at the valuation date.
  • L1-26. The details for contract recognition and contract boundaries are specified in the Level 2 text.
  • L2-32. A contract is recognised and valued as soon as the IAIG becomes party to that contract, without any possibility to amend or cancel it, even when the insurance coverage has not yet started.
  • L2-33. A contract is derecognised when all possible claims linked to this contract have been completely settled, and all future cash flows are nil.
  • L2-34. Only those contracts recognised at the reporting date are taken into account in the current estimate calculation; in particular, no future business is included in the calculation.
  • L2-35. All obligations, including future premiums, relating to a recognised contract are taken into account in the current estimate cash flow projection. However, future premiums (and associated claims and expenses) beyond either of the following dates are not considered, unless the IAIG can demonstrate that it is able and willing to compel the policyholder to pay the premiums:
    • a. The future date where the IAIG has a unilateral right to terminate the contract or reject the premiums payable under the contract; or
    • b. The future date where the IAIG has a unilateral right to amend the premiums or the benefits payable under the contract in such a way that the premiums fully reflect the risks.
  • L2-36. For group policies, similar rules apply. If premiums can be amended unilaterally for the entire portfolio in a way that fully reflects the risks of the portfolio, the second condition above is considered to be met.

3.2.3 Data quality and setting of assumptions

  • L1-27. The calculation of the current estimate is based on up-to-date and credible information and realistic assumptions. The determination of the current estimate is objective, comprehensive, and uses observable input data.
  • L1-28. The requirements relating to data quality and modelling assumptions are specified in the Level 2 text.
  • L2-37. When selecting data for the calculation of the current estimate, the IAIG considers:
    • a. The quality of data based on the criteria of accuracy, completeness and appropriateness;
    • b. The use and setting of assumptions made in the collection and processing of data; and
  • c. The frequency of regular updates and the circumstances that trigger additional updates.
  • L2-38. When only limited or unreliable data are available from the IAIG’s own experience, the IAIG supplements its own data with data from other sources. When the characteristics of the portfolio differ from those of the population represented in the external data used, the external data are adjusted in order to ensure consistency with the risk characteristics of the IAIG’s portfolio.
  • L2-39. The assumptions used to calculate the current estimate reflect current expectations based on all information available. This requires an assessment of expected future conditions, in particular as soon as:
    • a. There is evidence that historical trends will not continue, that new trends will emerge or that economic, demographic and other changes may affect the cash flows that arise from the existing insurance contracts.
    • b. There have been changes in underwriting procedures and claims management procedures that may affect the relevance of historical data to the portfolio of insurance contracts.
    • c. Historical data do not capture types of events that may have an impact on the current estimate.

3.2.4 Management actions

  • L1-29. The current estimate calculation may recognise management actions when such actions are objective, realistic and verifiable. Management actions recognised in the calculation are not contrary to contract boundaries, to the IAIG’s obligations to policyholders or to legal provisions applicable to the IAIG.
  • L1-30. Further details regarding the recognition of management actions in the current estimate calculation are provided in the Level 2 text.
  • L2-40. Assumed future management actions are consistent with the IAIG’s current business practice and business strategy unless the GWS is satisfied that there is sufficient evidence that the IAIG will change its practices or strategy.
  • L2-41. When calculating the current estimate, future management actions are taken into account only if they can reasonably be expected to be carried out under the specific circumstances to which they apply.
  • L2-42. The assumptions about future management actions take into account the time needed to implement them, as well as any resulting incremental expenses and changes in policyholder behaviour.

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3.1 Valuation principles3.2.5 Discounting