PGN 110 ESG and Calibration Survey - South African Long-term Insurers 2008 results

The report documents the results of PricewaterhouseCoopers Actuarial and Insurance Management Solutions’ (PwC AIMS) first survey of South African life insurers’ approaches to valuing embedded investment derivatives using market consistent techniques.

The recently updated Professional Guidance Note 110 (PGN110) “Allowance for Embedded Investment Derivatives” requires market consistent valuation of derivatives embedded within life insurance policies. These complex options and guarantees include minimum investment guarantees and guaranteed annuity options, but also extend to any feature that depends non-linearly on market prices.

Market consistent valuation requires the embedded derivatives to be valued, as far as practical, in line with observable market prices for traded instruments. The aims of market consistent valuation are threefold:

1. Improve the accuracy of valuation of complex instruments by using advanced techniques from the world of financial economics.
2. Mark the instruments to market using current market prices to reflect the information processing power of reasonably efficient markets.
3. Create a more objective valuation methodology to improve comparability between insurers and across industries, and to reduce the scope for intentional or purely misguided manipulation of values.

• Is financial economics, with its tendency to assume normality and discard uncomfortable observations, the best source of valuation techniques?
• Are markets efficient, or are they driven to extremes by greed and fear and otherwise distorted by the behavioural biases of the participants?
• What happens to the objective standard when the embedded derivatives we need to value have characteristics very different from anything observable in the markets?

  Download the report (602 Kb)