The Update Page for
“An Introduction to the Mathematics of Australian Life Insurance”

This is the Web Page for my book “An Introduction to the Mathematics of Australian Life Insurance”, published in 1996. When sections of the book became out-of-date due to new developments in legislation or LIASB Standards, I described the developments here.

The book finally sold out in 2006 and I no longer actively research this area. This page is no longer updated.


LIASB Standards

The “Further Reading” in Appendix C refers to:

Revised Exposure Drafts of Guidance Notes 254 and 255 were issued in November 1995.

The above documents have now all been superseded by standards issued by the Life Insurance Actuarial Standards Board (LIASB)

The first versions of these standards were:

There have since been several revisions. The most recent versions of the standards are available on the APRA web site. These standards now also apply to Friendly Societies.

The most recent LIASB standards do contain several differences to the March 1995 documents on which my book was based. However, since my book only ever gave a very general coverage of the standards, it is still mostly correct. Here are the bits that do need updating.

Policy Liabilities

The method for determining policy liabilities described in my book is still in use for risk products and conventional business. Policy liabilities for unbundled savings products are now determined by a different method, mor akin to the accounting techniques used for unit trusts.

Solvency

Section 8.3 of the book noted that the term “Solvency Standard” was used to refer to both the amount of money resulting from the set of rules and to the set of rules themselves. This double-meaning has been solved. The amount of money is now called the Solvency Requirement. Hence we can now say that the Solvency Standard is a document describing how to determine the Solvency Requirement. Similarly the Capital Adequacy Standard is the document describing how to determine the Capital Adequacy Requirement.

The calculation of the Solvency Requirement begins with the calculation of

Present value of future expected claims and expenses -
Present value of future expected premiums

on a conservative basis. This result of this calculation is now called the Solvency Liability. The similar number in the Capital Adequacy Standard is called the Capital Adequacy Liability.

There is now a clearer distinction between two standards on the issue of whether the insurer is viewed as a going concern.

The Solvency Standard is based on the scenario that the insurer has been closed to new business but will remain in operation until all its existing policies have run their natural course. Thus one new feature of the Solvency Standard is an “Expense Reserve”. This allows for the fact that it takes time to reorganise the company to operate as a closed fund, and hence the insurers expense levels would not instantaneously drop to the level of maintenance expenses assumed in the calculation of the Solvency Liability. The application of the surrender value minimum is now also more complex, (as described in sections 3.3 and 3.6 of the standard.)

The Capital Adequacy Standard is based on the scenario that the insurer is a going concern still writing new business, (unless of course there are good reasons to believe this does not reflect reality.) Thus this standard no longer concerns itself with making adjustments for assets which may have no value in a wind-up situation. The Capital Adequacy Requirement now also explicitly identifies a “New Business Reserve” which is the additional amount (if any) required so that (on the Capital Adequacy Standard basis) the insurer will satisfy the Solvency Requirement at all times during the next 3 years allowing for the planned levels of new business.

The last step in the calculation of the Capital Adequacy Requirement for a statutory fund is to subject it to a minimum of the Solvency Requirement for that fund. Based on the earlier standards, my book noted that in most cases the Capital Adequacy Requirement would significantly exceed the Solvency Requirement, and so the presence of the minimum would have no effect.

The change in philosophy described above combined with several adjustments to the bases used in the calculations seems to have significantly altered this situation. Practicioners are now suggesting that the minimum will apply in many cases. That is, in many cases, the Capital Adequacy Requirement and Solvency Requirement will be equal.

Accounting Standards

In November 1998, the Australian Accounting Standards Board (AASB) and the New Zealand Financial Reporting Standards Board jointly issued the accounting standards known as AASB 1038 "Life Insurance Business" and FRS 34 "Life Insurance Business".

These standards provided the accounting structure which meshed with the actuarial structure set out in the LIASB standards. The accounting standards do not appear to be available on the web.

More recent developments in accounting standards are implementing harmonisation with international standards.