Setting Assumptions (21 – 22)

Question 1

Basic Methodology

Answer 1

1. Past experience
2. Consider future expected conditions
3. Determine best estimate assumptions
4. Credibility & relevance of data
5. Adjust for margins / prudence

** Consistence should be guiding principles

Question 2

Margins for prudence influences (3)

Answer 2

– purpose if model

– degree of risk

– sensitivity of results

Question 3

Assumptions

Answer 3

Demographic

Economic

Question 4

Demographic assumptions

Answer 4

1. Mortality
   • target market
   • underwriting controls

– Base
– Trend

2. Morbidity
   • disability incidence
   • duration of income protection
3. Withdrawals
   • economic & commercial factors

Question 5

Economic assumptions

Answer 5

– investment return
– expense and commission
– expense inflation
– persistency (?)
– margins
> risk discount rate
> stochastic approach
> margins on expected values

** profit criteria

Question 6

Mortality trend approaches

Answer 6

1. Expectations
2. Extrapolation
3. Explanatory / process based

Question 7

Investment parameters affected by

Answer 7

1. Significance
2. Investment guarantees
3. Reinvestment risk
4. Intended investment mix
5. Reserve size

Note
– market consistency
– taxation
– future bonuses

Question 8

Expense & Commission (6)

Answer 8

1. Initial
   • acquisition
   • medical underwriting
   • administration
2. Renewal
   • administration
   • commission
3. Investment
4. Withdrawal / paid-up
5. Claim / maturity
6. Fixed expenses

Question 9

Risk discount rate: PD features increasing risk (6)

Answer 9

– lack of historical data

– high guarantees

– options

– overhead costs

– design complexity

– untested market

Question 10

Consistency

Answer 10

– investment return & inflation

– investment return & bonus loading

– investment return & withdrawal rates

– tax

– new business & expenses

– other products

Question 11

Valuation basis should reflect

Answer 11

1. Expected future experience
2. Margins to ensure adequate of reserves
3. Legislations / regulation
4. Need for consistency

Question 12

Types of bases / liability valuation

Answer 12

1. Published accounts
2. Supervisory reserves
3. Internal management accounts
4. Embedded value

Question 13

Published account legislative restraints

Answer 13

– going concern v breakup basis

– true & fair

– best estimate / include margins

Question 14

Embedded value sum

Answer 14

1. Shareholder-owned net assets (A-L)
   +
2. PVFP (PV of future shareholder profits from existing business)
   –
3. Cost of required capital

Question 15

Appraisal value

Answer 15

Embedded value

+

Goodwill

Question 16

Consistency in setting valuation basis

Answer 16

1. Previous basis
2. Assets vs liabilities
3. Pricing basis
4. Supervisory vs internal valuation

Question 17

Embedded value purpose

Answer 17

1. Internal management accounts
2. Published accounts
3. Remuneration
4. Transactions

Question 18

Consistency in setting embedded value

Answer 18

– previous basis
– assets vs liabilities
– pricing basis

Question 19

Factors influencing mortality experience

Answer 19

– target market

– distribution channel

– underwriting practices

– selective withdrawals

– mortality changes

Question 20

Assess statistical risk (4)

Answer 20

1. Analytically
2. Sensitivity analysis
3. Stochastic model
4. Comparison with market data

Question 21

Persistency (5)

Answer 21

1. distribution channel
2. economic morale
3. policy size / cost
4. surrender benefit
5. fund performance

• premium payment method
• premium frequency
• premium size

Question 22

Claim incidence CI

Answer 22

– medical advances
– early diagnostics
– simpler operations

Question 23

Claim incidence LTCI

Answer 23

– Cap on benefit
– indemnity
– economy
– inflation
– capacity of facilities
– medical advances