Life Insurance Financial Management and Accounting
Life Insurance Financial Management and Accounting
This domain tests how life insurers report results, hold reserves, manage solvency and measure value. It covers valuation, solvency, asset-liability matching, surplus distribution and embedded value.
Core rules and concepts
- Policy reserves: mathematical reserves valued on a prudent basis using valuation mortality, interest and expense assumptions.
- Solvency: available solvency margin (admissible assets minus liabilities) divided by required solvency margin. A ratio above the prescribed minimum (often 150%) indicates compliance.
- Investments: admissible assets, diversification, matching of assets to liabilities, and limits on exposure.
- Profit and value: surplus emerges as assumptions are released; embedded value equals net asset value plus present value of future profits.
- With-profit business: bonuses and surplus distribution must follow policy terms and regulatory rules.
Worked example
An insurer has available solvency margin of 600 crore and required solvency margin of 400 crore. Solvency ratio = 600 / 400 = 150%. This meets a 150% minimum but leaves no buffer. If interest rates rise and asset values fall by 50 crore, the ratio becomes 550 / 400 = 137.5%, below the minimum. The reasoning: solvency is a ratio of admissible resources to required capital, so both numerator and denominator matter.
Traps
- Treating accounting profit as free surplus available for distribution.
- Including inadmissible assets in the solvency calculation.
- Ignoring asset-liability mismatches.
- Double-counting reinsurance recoveries.
- Assuming embedded value equals accounting net worth.
Key points
- Mathematical reserves use prudent valuation assumptions.
- Solvency ratio = available margin / required margin.
- Only admissible assets count toward solvency.
- Embedded value combines net assets and future profits.
- With-profit surplus distribution follows policy terms and regulation.