8I: Australian MoS

[working girl]

I think I'm missing something in the reading of 301-00, INcome Based Reserves. On page 40, it shows a chart for Australian MoS with a Best Estimate Basis and MoS Basis. What is the difference in calculating the liabilities? I must be a space cadet because I thought BEL was how you calculate the liability.

Help! and thanks.

[mayreeh]

The policyholder liability is equal to the Best estimate liability plus the PV future margins.

I interpret their chart as the best estimate liability being the "best estimate basis" and the total liability being the "MoS basis".

[Double High C]

Remember that if the PV(future margins) were negative, then the total policy liability would be set to the BEL. (You can't defer losses.)

(One would hope this would not happen at issue, anyway.)

[Viking]

While we're talking about MoS, I figured I'd throw in a thought...

Don't you like the part in that study note where on one page they say that Solvency requirements assumptions are at the discretion of the actuary but that Capital adequacy requirements assumptions (not sure I'm using the exact words, just so I'm clear, the layer where you assume no new sales vs the one where you assume 3 years of new sales) are more or less fixed by regulation, and on another page they say exactly the opposite?

What should we conclude??

I think that solvency (no new sales) is set by regulations and capital adequacy (3 years of new sales) are at the discretion of the actuary, but I'm not sure...

Any thoughts? :-?

[Double High C]

While we're talking about MoS, I figured I'd throw in a thought...

Don't you like the part in that study note where on one page they say that Solvency requirements assumptions are at the discretion of the actuary but that Capital adequacy requirements assumptions (not sure I'm using the exact words, just so I'm clear, the layer where you assume no new sales vs the one where you assume 3 years of new sales) are more or less fixed by regulation, and on another page they say exactly the opposite?

What should we conclude??

I think that solvency (no new sales) is set by regulations and capital adequacy (3 years of new sales) are at the discretion of the actuary, but I'm not sure...

Any thoughts? :-?

I see the same contradiction (on pages 18 and 25), and it seems to me that your guess is correct.

My reasoning is that on Page 25, it seems to say that it is intended that the approach to Solvency Reserves be consistent among companies. Also, since the Capital Adequacy Standard is intended to ensure that a company can meet its business plan, it seems that it is only appropriate that its (actuary's) assumptions be used.

[chica]

Don't have the study note in front of me to answer, but I do know one thing about this note: it bites! That's all I'm certain of at this point, though. Sorry, just venting...

[ACCtuary]

You mean that discussion of Australian MoS doesn't end with Course 5??
:shake:

[mayreeh]

Sorry, Australian MoS doesn't end with course 5. Not sure why though.....

Theoretically, perhaps the Australian approach with the fair value of assets and liabilities is supposed to prepare us for the possibility of new international accounting standards. (Everything at fair value.) But from what I've heard, it seems more like the value based accounting than the Australian method.

[Double High C]

Sorry, Australian MoS doesn't end with course 5. Not sure why though.....

Theoretically, perhaps the Australian approach with the fair value of assets and liabilities is supposed to prepare us for the possibility of new international accounting standards. (Everything at fair value.) But from what I've heard, it seems more like the value based accounting than the Australian method.

It is more like Canader without PADs, but with marking both assets and liabilities to market; very similar to Value Based (should be the same, if required capital is defined consistently, which I am not sure is the case).

Having said that, a problem with VB (as it is currently set up, and how it is described in the note we have) is that it does not take embedded options into account. I suppose one could adjust the hurdle rate.

One other thing regarding IAS is that some are still trying to get them to adopt a "deferral and matching" type of approach, which could end up being MoS-like, I guess.