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IFoA SP2 study materials
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IFoA SP2: Life Insurance Actuarial Practice (SP2): Solvency II, IFRS 17 and With-Profits

IFoA SP2 · Work through your exam, one topic at a time.

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Life Insurance Actuarial Practice (SP2): Solvency II, IFRS 17 and With-Profits

What SP2 tests

SP2 covers how a UK life insurer is priced, reserved, capitalised, reported and governed. Questions combine calculation with judgement: state your basis, apply regulation as it stands, explain the commercial consequence. Products include term and whole life assurance, annuities, income protection, with-profits and unit-linked savings, and bulk annuity buy-ins.

Core rules

  • Solvency II technical provisions = best-estimate liability (discounted cash flows, expenses allowed, no prudence) + risk margin. The matching adjustment lets eligible annuity portfolios discount using a portfolio yield, subject to a fundamental-spread haircut and conditions: fixed, illiquid, held to maturity.
  • The risk margin applies a 6% cost-of-capital rate to projected SCR for non-hedgeable risks; it is highly sensitive to run-off, so long-dated annuities carry a large margin.
  • With-profits: policyholders receive the higher of the guarantee and the (smoothed) asset share. Bonus declarations reference asset shares, fund solvency and the PPFM; the with-profits actuary advises the board and the WPICC checks compliance.
  • IFRS 17: fulfilment cash flows plus a risk adjustment, with the CSM released over coverage units; the Variable Fee Approach applies to unit-linked and with-profits business.

Worked example

A with-profits endowment matures. Asset share is £82,000; guaranteed benefits (sum assured plus declared reversionary bonuses) are £50,000. The PPFM sets a terminal bonus of 60% of the excess of asset share over guarantees, subject to smoothing.

Payout = 50,000 + 0.6 × (82,000 − 50,000) = 50,000 + 19,200 = £69,200. The £12,800 difference remains in the estate, supporting smoothing and guarantees; the firm must still show the distribution is fair to this cohort. An MVR would apply on surrender, not at maturity.

Traps

  • Quoting Solvency II technical provisions as the IFRS 17 liability - the CSM is neither prudence nor risk margin.
  • Ignoring policyholder tax: it reduces asset share, and hence the bonus declared.
  • Treating the terminal bonus as guaranteed or as freely cuttable, or granting matching adjustment to non-annuity business.