Chapter 21 - Setting assumptions (1) Flashcards
Which risks can be reduced by appropriate investment matching
- Investment risk
- Inflation risk
- Marketing risk
What is the common framework used to derive assumptions
- Investigate the historical experience and make the best estimates of the parameters from that experience
- Consider what the conditions (including the commercial and economic environment) will be like in the future period for which you are making your assumptions
- Determine what the best estimates of your assumptions will be, given the expected future conditions
- The extent to which you would rely on the experience data, and the extent to which you would allow for other factors, including judgement, depends on the credibility and relevance of the data, and how predictable the parameter is
- The best estimate may need to be adjusted in order to include a margin for prudence
What is the main demographic assumption that is used to price a life insurance contract
Mortality rates
The expected future experience of the policyholders will depend crucially on what
- The target market for the contract
- The underwriting controls applied
- The expected change in experience in the experience since the time of the last historical investigation to the point in time at which the assumptions will on average apply
What are the advantages and disadvantages of using reinsurers’ statistics
Advantages:
- They have access to the mortality experience of many direct writers. Sometimes theirs may be the most relevant available.
Disadvantage:
- The data relates to a large number of companies. Each of these companies have their own target market and underwriting procedures
What might cause the mortality experience of new policyholders to be different from that of the population analysed
DUST M
A change in
- Distribution channel
- Underwriting practice
- Selective withdrawals
- Target market
- Mortality over time
What are the different approaches to determining future rates of mortality improvement
Expectation approaches - involve expert opinion and subjective judgment to specific a range of future scenarios
Extrapolation approaches - are based on projecting historical trends in mortality into the future
Explanatory approaches - attempts to model trends in mortality rates from a bio-medical perspective
What are the data limitations for income protection
- Published insurance parameters for incidence have limited credibility
- Worldwide statistics are plentiful, especially from the US, but may not be relevant
What are the other influences on claim distribution
- Advancement in medical science, which will impact cures
- Earlier diagnosis
- Simpler and more readily available operations
The value assigned to the investment return parameter will be affected by:
GRAM
- The extent of the investment GUARANTEE given under the contract - this will affect the types of assets in which the premiums from the contract will be invested
- The extent of any REINVESTMENT risk and the extent to which this can be reduced by a suitable choice of assets
- The significance of the ASSUMPTION for the profitability of the contract, which will depend on the level of reserves built up and the investment guarantees given
- The intended investment MIX for the contract, the current return on the investments within that mix and, where appropriate, the likely future return
What are the two key factors that lead to the sensitivity of the investment assumption
- The size of the reserves built up (The larger the reserve, the greater the proportion of total cashflow that arises from investment income)
- The investment guarantees given ( The higher the investment guarantee given, the greater the care needed over setting the level of assumption)
What should the parameter value for expenses reflect
It should reflect the expected expenses to be incurred in processing and subsequently administering the business to be written under the product being priced
What marginal expenses should be allowed for when pricing
- Initial acquisition
- Initial medical underwriting
- Initial administration
- renewal administration
- renewal reward to sales channel
- Investment
- Withdrawal / paid-up expenses
- Claim/maturity administration
How to incorporate into the charging structure the expenses which do not vary by size of contract
- Individual calculation of premium rates or charges
- Policy fee addition to the premium - or deduction from regular benefit payments, for non-unit-linked contracts or charges that match the per-policy expenses for unit-linked contracts
- Sum assured differential - For non unit-linked contracts, different premium rates are charged according to which band the benefit requested falls into. For unit-linked contracts, different charges, for example allocation rates, are applied according to which band the premium payable falls into
What should be considered when setting the value of the inflation parameter for expenses
- Current rates of inflation, both for prices and earnings
- Expected future rates of inflation
- the differential between the return on government fixed-interest securities and on government index-linked securities
- Recent actual experience of life insurance company or industry
