An Analysis of the New Accounting Rules and the Effects on the Risk Return

Specialeforsvar ved Maria Nasgård

Titel: An Analysis of the New Accounting Rules and the Effects on the Risk Return

Resume: This thesis examines the effects of the two new executive orders on preparation of financial statements and the contribution principle, that come into force from January 1st, 2016. Classic concepts in life insurance mathematics are updated to comply with the new legislation in this field, such as the guaranteed payments which now have to include expected policyholder behavior. This means though that the other reserves revolving the
behavior of policyholders become redundant. We find that this affects the balance sheet a great deal. Fewer items make the accounting somewhat simpler, although it shows that newly introduced items such as the solvency capital requirement and the risk margin are complicated sizes, which leads to heavy calculations. Naturally the risk the equity faces is also affected by the above mentioned changes. We examine the fair share that the equity should take as payment for the risk they have taken on by administrating the portfolio. This is shown to be heavily influenced by the hedging strategy when comparing the two scenarios of perfect hedging of the liabilities and no hedging at all by simply placing the premiums on a bank account. The result is very intuitive, since hedging eliminates interest rate risk, the equity faces less risk and the fair share they should take is calculated to be smaller. Another influence is the risk margin which represents the extra capital that is needed if another company were to take over the portfolio's liabilities. We only include the mortality risk when calculating the risk margin. We observe that this does make an impact on the equity's fair share. Although this mortality risk is not something one can hedge against, we still discover that by fully hedging there is close to no risk for the equity even with added risk.

Vejleder: Mogens Steffensen
Censor: Jesper Olesen