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Empirical Evidence on the Use of Dynamic Solvency Testing and Financial Condition Reporting in the United Kingdom Life Insurance Industry

Published online by Cambridge University Press:  10 May 2011

Y.-M. Shiu ,
P. Moles ,
A. T. Adams  and
C.-C. Chan
Y.-M. Shiu
Affiliation:
Department of Business Administration, National Cheng Kung University, Taiwan., Email: yungming@mail.ncku.edu.tw
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Abstract

To gain insight into the use of Dynamic Solvency Testing (DST) and Financial Condition Reporting (FCR), a questionnaire was distributed to Appointed Actuaries in United Kingdom life offices. The response rate of the main survey was 76%. An independent-samples t-test for non-respondent bias was conducted and the results suggest that the respondent sample is representative of the survey population. Results from the 62 firms responding revealed: (1) Scenario testing was the most commonly used DST techniques. (2) Most life offices regularly run less than ten scenarios in scenario testing. (3) Most life offices reported using a five-year forecast period in DST. (4) The two most commonly seen difficulties are: difficulties in communicating complex issues to non-specialists, and how to present extremely adverse scenarios without causing undue concern. (5) Nearly all life offices use FCR. (6) Guidance Note 2 is generally considered acceptable. (7) Compared with the results reported by previous studies, the use of DST techniques is now more common in life offices. (8) There is a significant difference in DST/FCR practices between with-profits and non-profit offices.

Keywords

Sensitivity AnalysisScenario TestingStochastic SimulationLife Insurers
Type
Papers
Information
Annals of Actuarial Science , Volume 1 , Issue 2 , September 2006 , pp. 359 - 392
Copyright
Copyright © Institute and Faculty of Actuaries 2006

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References

Canadian Institute of Actuaries (1998). Standard of practice on dynamic capital adequacy testing. (In effect January 1, 1999.)Google Scholar
Dynamic Solvency Testing Working Party (1994). Dynamic solvency testing. The Proceedings of Current Issues in Life Assurance, Seminar, 2 November 1994, the Faculty and Institute of Actuaries.Google Scholar
Muir, M. & Sarjant, S. (1997). Dynamic solvency testing. Paper presented to the Staple Inn Actuarial Society on 4 March 1997.Google Scholar