Regulatory mathematical reserves IPSB

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The PSB requirements for with-profits business contain the mathematical reserves component.

These are firms ’ provisions for policyholder liabilities.A firm ’s liabilities comprise any amounts that have been guaranteed to policyholders. Before 1st Jan 2005 it used to include an assessment of future bonuses.

Mathematical reserves are calculated according to prudent,actuarial methods.

Firms are required to look into the future to expected cash flows arising from currently in force business and to discount these back to a net present value reserving requirement.

Cashflows will include both payments made to policyholders and premiums received.The discount rate applied to projected policy liabilities is calculated from the rate of return on fund assets.

However,the exact amounts and timings of future payments to policyholders are uncertain.And the future returns that will be achieved on the assets backing the liabilities are also uncertain.

So prudent adjustments are made to both expected cash flows and the reserving discount rate.Mathematical reserves therefore include what are commonly called ‘margins for adverse deviation ’.

The mathematical reserving rules on the discount rate adjust the rate of return on fund assets to incorporate an allowance for reinvestment risk and other asset related risks,such as counterparty default risk.Various prudent adjustments are made to projected cash flows.