Actuarial valuation
| Actuarial valuation |
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Actuarial valuation allows to assess the value of assets. It concerns both the insurance, financial and reinsurance industries. The actuary's task is to calculate theamount of future liabilities of theservice recipient and to prepare a planallowing to meet them without financiallosses. The task is therefore not an easy one - the financial market never offers 100% guarantees. The actuarialvaluation, which is carried out by aprofessional actuarial office withexperience and privileges gives a veryhigh probability of verifiability. The assumptions are based on statistical methods and include longterm data.
Actuarial valuation may help:
- assess the level of assets and whether they are enough to back employee benefits liability,
- assess required contribution for trust of fund,
- calculate cost ot taking on benefits liability in acquisition.
Not every benefit requires actuarial valuation, for example those which cannot be encashed [1].
Actuarial valuation process
An actuary is a specialist in insurance mathematics as well as statistics andprobability, economics, insuranceaccounting, as well as databases andmathematical modelling. Thisknowledge, combined with modern andproven methods of work, allows for anextremely accurate valuation. Thestarting point for its implementation isthe analysis of the company's initialsituation.
There are several steps in the process:
- making assumptions about future salary increment rates, attrition, mortality rates,
- assumption about discount rate to calculate present value of future payments.
The present value is the value you are looking for. However, usually actuarial report will cover many other informations.
Profits and losses
Taking into account the importance ofdemographic and financialassumptions, we can present profitsand losses as a position they consist of:
- Changes in provisions for employeebenefits resulting from changes indemographic assumptions (includingchanges in assumptions concerning: employee turnover, disability benefits, early retirement, employee mortality),
- Changes in provisions for employeebenefits resulting from changes infinancial assumptions (includingchanges in assumptions concerning: discount rate, salary increase in theentity),
- Changes in the value of provisions foremployee benefits resulting fromdifferences between the actualachievement of assumptions during theperiod (in the period set by the currentand previous balance sheet dates) and the actuarial assumptions used tomeasure provisions for the previousbalance sheet date [2].
Provisions for severancepayments and retirementbenefits
Determining the amount of theprovision for employee benefitsrequires specialist knowledge. Whencommissioning such a service to anactuary, the entity should preciselydefine its expectations and provide theinformation necessary for a correctvaluation. A retirement benefit is a one-off cashbenefit paid by an employer to anemployee whose employmentrelationship is terminated onretirement. This is a universal benefit towhich all employees are entitled. It istherefore worth noting that thepayment of pension benefits is theresponsibility of the employer, whoshould establish in good time theprovisions necessary for theirrealisation.
For the valuation of provisions forretirement severance pay, theprojected unit method, also called theaccrued benefits method as a functionof seniority, is applied. During themeasurement, the amount of theprovision for retirement benefits shouldbe determined at the balance sheetdate as the sum of the provisions forindividual employees of the entity.
References
- Wüthrich, M. V., Bühlmann, H., & Furrer, H. (2016). Market-consistent actuarial valuation (Vol. 2). Springer,
- Vernimmen P., Quiry P.,(2009). Corporate Finance: Theory and PracticeJohn Wiley & Sons (7.15),
- Wüthrich M.V., Merz M.,(2013).Financial Modeling, Actuarial Valuation and Solvency in Insurance.Springer,6 (155-164),
- Peng J.,(2008). State and Local Pension Fund Management.CRC Press Taylor & Francis Group,(3).
Footnotes
Author: Natalia Windys
