5 ACTUARIAL ASSUMPTIONS

In Slovenia actuaries have freedom to estimate all of the parameters used in the calculations.

Economic assumptions

The consumer price index is eliminated from all economic indices (i.e. real indices are used). It has proven to be more reliable due to a relatively high and variable price inflation in Slovenia (about 8%) and the experienced fact that real earnings on investments as well as other real economic indices are almost independent on the level of price inflation. For instance, interest rates on government bonds are linked to price inflation.

The discount rate ranges around 4% by most insurance companies.

The guaranteed net return rate on assets is typically 50% (40% minimum required) of the average return rate of government bonds. Due to this match of the guaranteed interest rate, the government bonds represent the bulk of portfolio investments.

Currently, they provide about 5% real returns. In this respect the achieved investment return is expected to be about 6%.

App 1 SL-5

A real average-salary growth is assumed to be about 3% pa. The average growth lies slightly below 4% in recent 10 years. During this period the same growth was recorded also for GDP. Since the economy had already recovered from a considerable fall in the beginning of 90's the growth is expected to be more modest in the future.

A career salary growth is expressed in the form of age-dependent salaries relative to the salary of an 18-year-old person. Regarding the tables, one expects an increase of about a factor of 3.5 in salaries over 40 years of employment. Possible dependencies on education, profession and current position are not considered yet.

Assumption\Benefit Old age pension Disability Widow/er or Orphan’s Pension

inflation (approx. 3%) Projections only + (if linked to final

salary) + (if linked to final salary) Career salary growth

(approx 3.4 times over 40 years)

Projections only + (if linked to final

salary) + (if linked to final

assets–inflation (6%) Projections only - -

Table: Economic assumptions that are used for each of the benefit types. A ‘+’

indicates that the corresponding assumption is implemented.

Demographic assumptions

Demographic parameters are usually derived and used within insurance companies as there are no widely accepted standard tables available on a public basis. Therefore, differences between companies can be considerable in this respect. This holds particularly for new products such as the disability benefits where availability of general population data is limited. In such cases, actuaries either directly implement foreign tables (German and others) or combine them with available data of Slovenian population. In addition the definition of permanent disability has also been changed with the new legislation making the use of past experience less reliable. Broadly, the disability is defined as a permanent inability to perform ones own or similar occupation. The practice shows that a recovery from the disability is very seldom.

Therefore, a recovery is not foreseen in the premium calculation. Some companies have also implemented higher mortality rates of disabled persons by combining relative increase of mortality used by foreign markets and standard mortality tables used in Slovenia.

Mortality rates are usually derived by combining past experience of insurance companies and mortality of Slovenian population. Most often applied annuity tables are ‘Sterbetafeln 1987 R’.

App 1 SL-6

Decrements\State Active Disabled Pensioner Widow or

Orphans

Table: Decrements from a given state (active, disabled,..) used in premium and reserve calculations in each of products separately. The following notation is used: OAP=Old Age Pension, DIS=Disability benefit, WID=Widow/er

and Orphan’s Pension.

6 COMMUNICATION OF RESULTS

A report signed by an appointed actuary is sent to the insurance supervisory authorities annually. The content of the report is set by the supervisory authorities. Annual results, solvency status, other future projections and analysis are communicated via an detailed actuarial report also to the management board of the company that is obliged to respect the conclusions in an appropriate way.

7 EXAMPLE DEMOGRAPHIC ASSUMPTION

Age qx

Table: Age specific mortality rates of Slovene male population in 1995 as published by the statistical office.

App 1 ES-1

SPAIN

1 ACTUARIAL INVOLVEMENT IN RETIREMENT BENEFITS

In Spain, actuarial calculations are required for occupational defined benefit plans that are established on either a qualified or non-qualified basis. Qualified plans are established under the law “Ley de Planes y Fondos de Pensiones”, 8 June 1987, and are to be financed by using a self-administered external pension fund. Actuarial involvement is a requirement of that law. The methods and assumptions to be used for qualified plans are governed by a regulation issued on 21 July 1990 (Orden da 21 de julio de 1990 sobre nomas actuariales aplicables a los planes de pensiones).

Non qualified pension plans will be required to be externally financed by making use of insurance arrangements. Additions to book reserves are no longer tax-deductible. The internal financing system will be banned in November 2002. Insurance policies require actuarial calculations with respect to contributions and mathematical reserves.

When the employer uses book reserves the accounting rules state that the amounts allocated should be based on actuarial calculations. There are as yet no precise rules on the method or assumptions to be used in these cases, or on the frequency of the valuations.