Denmark
277
traded, giving rise to observable market prices. For property, an economic model is used to provide an estimate of the market price. For the remaining assets—such as unlisted shares—a best estimate of fair value must be used. For the valuation of liabilities, a major obstacle is the absence of an active market where insurance and pension liabilities are traded and where an observable price can be determined. In Denmark, the Market Value Committee recommended the decomposition of technical provisions into several components, reflecting the guaranteed rates of return: • The guaranteed benefits, which measure the difference between the market value of the benefits guaranteed according to the terms of the insurance and pension contract and the market value of the future premiums to be paid • The bonus potential on future premiums, which measures the market value of the excess return over the guaranteed benefits that will arise from the future premiums • The bonus potential on premiums paid, which measures the market value of the excess return over the guaranteed benefits that arise on premiums that have already been paid. Furthermore, the collective bonus measures the value of bonuses that have been allocated to policyholders as a group but that have not yet been allocated to individual policyholders. The sum of guaranteed benefits, bonus potential on future premiums, and bonus potential on premiums paid constitutes the technical provisions, which form the base for calculating the solvency requirement. The collective bonus is not a part of the technical provisions and is, therefore, not taken into account in computing the solvency margin. The calculation of technical provisions must be based on • The best estimate of relevant underwriting risks (that is, mortality, morbidity, and the like) • The best estimate of market costs (administration costs) for which the insurance policies, on average, could be administered on conditions governing the market • A discount rate prescribed by the supervisor. Hence, technical liabilities must be reported at their best estimate. No general assumptions are used. The life insurance companies and pension