Proposals for the Statutory Basis of Valuation of the Liabilities of Long-Term Insurance Business

The Authors are members of a Working Party established by the Councils of the Faculty and Institute to consider the Department of Trade's proposed Rules for valuing the liabilities of long-term business. The paper opens with a short introduction followed by Part 2 which considers the control systems operating in several overseas territories. Part 3 is largely historical and traces the development of actuarial thought and practice since the war. The negotiations in Europe are also covered. Having set the scene, the Authors move to consideration of the Department of Trade's proposals (the proposed Rules for valuation of liabilities are included as an Appendix to the Paper). After a brief description of the proposed Asset Value Regulations in Part 4 the net premium valuation method is discussed in Part 5 and the problems of large fluctuations in the interest basis are illustrated by examples. Possible modifications to the conventional formula are explored with further examples. The elements of the valuation basis are discussed in turn with particular emphasis on the valuation rate of interest. The Authors conclude that the problems arising from use of high rates of interest in valuation are not so much a function of the inadequacy of the valuation method as an indication of the real financial strains to which offices are exposed in current conditions. The paper ends with a reminder that with the varied traditions of the British market no one set of Valuation Rules can satisfactorily cover every special case. Any statutory basis therefore must be seen as a compromise, and the Authors touch on special cases where they feel that it would be appropriate for the authorities to exercise their discretionary powers.