Valuation for Surplus

Synopsis

The paper is largely concerned with discussing what is a suitable valuation basis for deciding the rate of bonus an office should declare if it wishes to maintain this rate of bonus in the future as long as conditions remain reasonably stable.

Because of recent developments, such as the substantial proportion of the assets now held in ordinary shares, the reverse yield gap, the present historically high rate of interest and the growth of immediate annuity and other single premium business, a net premium valuation in conjunction with assets at balance sheet values gives an inadequate view of the position of an office. With the advent of electronic computers a more realistic and comprehensive view is now possible, and the paper advocates a valuation of the liabilities on a modified bonus reserve basis with rates of interest and bonus the same as those implicit in the current premium rates, and a valuation of the assets at a notional rate of interest equal to the rate used in the valuation of the liabilities. The various problems arising in the valuation of assets, and especially of ordinary shares, at a notional rate of interest are discussed, and also the adjustments necessary if the assets and liabilities are not fully matched.

The final decision on the rate of bonus to be declared must in the end be a matter of judgment, as it depends on many factors which cannot be accurately forecast, such as the future course of the rate of interest, the amount of new business and the rates of premium charged. Nevertheless, it is now possible to make this decision in the light of a very much fuller analysis of the position than has probably been made in the past.