Description: Since insurance contract liabilities are uncertain in amount, an estimate is required. And under most accounting frameworks, the estimate of an uncertain amount should contain some sort of margin for uncertainty. This paper provides a mathematical connection between that margin and the market price of risk as measured by the cost of capital. The connection makes use of the theory of utility and an exponential utility curve.

Description: This presentation is a panel discussion, session number 33PD, from the 2002 Valuation Actuary Symposium, held September 19-20 in Lake Buena Vista, FL. The panelists provide an update of the 2002 progress made by the International Accounting Standards Board [IASB] in moving to a type of fair-value reporting as presented in the IASB’s draft statement of position on insurance accounting. The panelists then present arguments supporting and opposing fair-value reporting, including comparison with U.S. GAAP accounting. Discussion from participants is included.

Description: Since solvency assessment depends on a financial reporting framework, one needs risk metrics for use in financial reporting. The essay argues that conceptually, the cost of capital is the appropriate metric for reserves, while a probability level is the appropriate metric for capital. Then the essay advocates stress testing on specific scenarios as a better practical approach to ORSA.

Description: The author refers to a separate article in this edition of Risks and Rewards, in which Babbel, Gold and Merrill provide an excellent exposition of three approaches to present-valuing a series of risky cash flows and provide several insights into the way modern finance theory deals with risk. The purpose of this article is to bring these insights to the world of insurance risks and view them in relation to existing actuarial techniques. The author also discusses direct discounting and the actuarial appraisal method and their consistency.

Description: This session 30 PD of the New Orleans Annual Meeting discusses how several organizations, with representation from a number of countries, are currently drafting new standards to create uniformity across nations. From the Record of the Society of Actuaries, Volume 27, No. 3.