The subject of valuation is one of the most important, and at the same time most difficult, of all the problems faced by actuaries.

The traditional approach to the subject has centred on discussion of the relative merits of the net premium and bonus reserve methods of valuation, and on the inherent conflict between valuation as a means of demonstrating solvency and valuation as a tool for ensuring a smooth emergence of surplus in accordance with the need to declare uniform reversionary bonuses. This approach is covered in the well-known papers by Redington (2) and Skerman (3) (4) and forms a significant part of the course of reading for examination subject 8 (formerly B2).

Bonus reserve methods are, typically, ‘active’ methods of valuation in which all relevant parameters, including expenses and future bonuses, are given values close to their expected values. The premium valued is the office premium, and assets are usually valued at market value or by discounting expected investment income. Because actual conditions are always changing, an active valuation method tends to lead to frequent changes of basis and this introduces an element of volatility to the results which can, in consequence, be difficult to interpret. Nevertheless, because of the emphasis on using realistic values for all parameters, it is commonly believed that bonus reserve methods are particularly appropriate for investigations into solvency, especially when external conditions are changing rapidly, and in determining appraisal values.