Risk assessment of long-term guarantees

Abstract

Actuaries have a range of methods at their disposal to check whether the balance sheet risks of life insurance companies are adequately covered. These methods examine the effects of adverse capital market scenarios on the assets covering the obligations and determine a risk-based capital requirement; all methods analyse short to medium-term observation periods.

In addition, the Responsible Actuary must also check in accordance with § 141 Para. 5 No. 1 Sentence 1 VAG whether the permanent fulfilment of the obligations arising from the insurance contracts is guaranteed at all times. Since November 30, 2005, the “Risk assessment of long-term guarantees” has been available to actuaries as an aid in assessing this fundamental question. This paper is the third update of this note. The basic approach of using Monte Carlo simulations to check whether the assets cover the guarantees in a sufficient number of scenarios remains unchanged. This also applies to the approach of only valuing the guarantees already received in the portfolio (including allocated or bindingly declared profit shares) (no consideration of new business).

Professional standards of practice are DAV publications that – together with the rules of professional conduct – set out the fundamental principles for the correct practice of actuarial activities. Professional standards of practice are characterised by their 

• treatment of specialist actuarial and professional issues,
• fundamental significance and practical relevance for actuaries,
• professional legitimisation through a implementation process that allows all actuaries to be involved in such implementation,
• correct application, with members being professionally safeguarded by a disciplinary process.

The professional standard of practice “Risikobewertung langfristiger Garantien (Risk assessment of long-term guarantees)“ is an advisory note. Advisory notes are professional standards that are to be taken into account in actuarial considerations, the application of which can be freely decided upon in individual cases, however, within the framework of the code of conduct, and which address specific questions.