Empirical Evidence on the Use of Dynamic Solvency Testing and Financial Condition Reporting in the United Kingdome Life Insurance Industry

Abstract

To gain insight into the use of Dynamic Solvency Testing (DST) and Financial Condition Reporting (FCR), a questionnaire was distributed to Appointed Actuaries in United Kingdom life offices. The response rate of the main survey was 76%. An independent-samples t-test for non-respondent bias was conducted and the results suggest that the respondent sample is representative of the survey population. Results from the 62 firms responding revealed: (1) Scenario testing was the most commonly used DST techniques. (2) Most life offices regularly run less than ten scenarios in scenario testing. (3) Most life offices reported using a five-year forecast period in DST. (4) The two most commonly seen difficulties are: difficulties in communicating complex issues to non-specialists, and how to present extremely adverse scenarios without causing undue concern. (5) Nearly all life offices use FCR. (6) Guidance Note 2 is generally considered acceptable. (7) Compared with the results reported by previous studies, the use of DST techniques is now more common in life offices. (8) There is a significant difference in DST/FCR practices between with-profits and non-profit offices.