Question 1

Briefly describe a common framework which can be used to drerive assumptions (5) (demographic assumptions)

Accepted Answer

1. Investigate _past experience_; make _past best estimate parameters_; appropriate in context of historical conditions/then-circumstances 2. Consider _future conditions_ (including commercial and economic environment ) during period for which assumptions will be used 3. Determine _future best estimates_ assumptions, given expected future conditions 4. Extent of (a) _relying past data_ vs (b) _allowing for other factors_, depends on data credibility/relevance + parameter's predictability 5. Adjust best estimates with margin. Size of margin depends on: purpose for which model is required degree of risk associated with parameter

Question 2

List the three main demographic assumptions that may be needed in order to price a health and care insurance contract (depending on the type of product involved).

Accepted Answer

1. mortality rates 2. morbidity rates 3. lapse rates

Question 3

List some of the main demographic assumptions for each type of health and care contract.

Accepted Answer

PMI Incidence Rates Critical Illness Incidence Rates Long-Term Care Transfer Probabilities (incidence and benefit amount) Other claim inception rates Persistency rates are also important for health care insurance conracts

Question 4

Key steps within framework for deriving demographic assumptions: List five key steps to be taken when deriving demographic assumptions, given the common framework used to set assumptions.

Accepted Answer

collect appropriate data grouping data adjusting the data calculate the rates adjusting the rates

Question 5

List key requirements to be satisfied for the data used when setting assumptions.

Accepted Answer

Key data requirements: data should be relevant (similar class of lives to that being insured) credible (sufficient volume to draw conclusions/remove random flactuations) reliable readily available Consideration should also be given to the cost and suitability of the data given the purpose for which the eventual assumptions will be used the extent of need to adjust data for credibility and relevance

Question 6

Collecting appropriate data for assumptions What conflicting aspects exist between _the period of time with respect to which data is collected _, and the _ volume of data used for setting assumptions_ ? (2)

Accepted Answer

data would relate to an appropriate period of year, such that volume is adequate.. ...but excessive heterogeneity due to changes over time is not introduced

Question 7

List various data sources which can be used for setting demographic assumptions (5)

Accepted Answer

Data sources Own data Population data Reinsurer data Market data Other sources

Question 8

Collecting data: data sources, own data Briefly touch on the use of the insurer's own data for setting assumptions in terms of - relevance (4) - how own data ranks compared to other data sources (3) - volumes of data (2) - limitations of using own data (2)

Accepted Answer

Own data is highly/most relevant in terms of underwriting approach, policy condition, claims management and distribution channel Own experience is best case. cost, reliability and format are not issues Volume may not be sufficient for credibility, particularly for risk cells. may need adjustment Limitations for brand new entrants into market, there will be limited own data, and so such insurers will have to be totally reliant on external sources

Question 9

Collecting data: data sources, population data Briefly touch on the use of population data for setting assumptions in terms of - where the data may come from and a key point related to population data (1) - advantages of using population data (4) - disadvantages of using population data (6)

Accepted Answer

How population data may arise and a key point related to it: government may periodically produce analysis of healthcare experience for population key point related to population data: for some risk cells, it may be the data available to form a starting point for assumption setting Advantages: readily available, often free. usually high volume and credible Disadvantages: Nation data may not be relevant to insured lives. Better if data is split by groups, regions, age Insured population may behave/utilise differently to national population (i.e. utilise more) Sickness and incapacity definitions will be different to ‘claim’ definitions in policy Accuracy and reliability may be questionable, especially where definitions are subjective. Scope for double counting is enormous Data may not be available electronically, or in an appropriate format May be out of date before it is even published

Question 10

Collecting data: data sources, reinsurer data Briefly touch on the use of reinsurer data for setting assumptions in terms of - how the insurer would gain access to reinsurer data (1) - advantages of using reinsurer data (3) - disadvantages of using reinsurer data (5)

Accepted Answer

How does insurer gain access to reinsurer data? Reinsurer may have data as part of its services offered to insurer Advantages There is motive for reinsurer data to be as accurate/fair as possible since profits under reinsurance treaty depends on calculated premiums Reinsurers draw information from other companies, and other countries. Excellent for launching new product lines. Will usually provide data as part of a contract Credibility will vary, but more credible than insurer's own data Drawbacks/important points Will need to consider divergence of own future experience from reinsurer data and adjust accordingly Differences could arise due to differing claims definitions, claims management processes, underwriting processes, etc The use of reinsurance comes at a cost; eg reinsurer will likely provide data in return for share of insurer's business this will need to be factored into the choice of using reinsurer data and whether is is worthwhile

Question 11

Collecting data: data sources, market data - intro What kind of market data may an insurer use to set assumptions? (2)

Accepted Answer

insured lives data (industry data) returns to an insurer supervisor/regulator

Question 12

Collecting data: data sources, market data - insured lives/industry data Briefly touch on the use of the market data (insured lives data) for setting assumptions in terms of - how this data may arise/be obtained (2) - in terms of credibility and relevance, how does this data source compare to insurer's own data and population data? (2) - advantages of using this data (6) - drawbacks of using this data (4)

Accepted Answer

Insured lives data (aka industry data) may come/be obtained as a result of an agreement between insurers to pool claims and policy statistics for industry-wide collection. E.g. CMI in UK sometimes form the basis of mortality tables Biggest considerations/issues: more credible than insurer's own data, but less relevant. more relevant than population, but less credible Advantages: usually compiled by experts highly credible and may be of sufficient volume represents insured experience (as opposed to, eg national stats, which include experience of non-insured lives) should reflect local companies and market practices within which insurer likely operates... ...benefits all, as individual companies may get an analysis/comparison of their own experience compared to market national relevance Drawbacks: relvance questionable, as only represents a market average, not relevant to any one company policy conditions, underwriting and claims management may differ may take years for sufficient data to accumulate, depending on level of participation of various market participants industry wide data may be very limited; usually available for long term business classes (LTCI, CI), but not for short term (PMI)

Question 13

Collecting data: data sources, market data - returns to an insurance supervisor Briefly touch on the use of the market data (insured lives data) for setting assumptions in terms of - how this data may arise (1) - briefly list advantages of using this data (3) - brielfy list disadvantages of using this data (2)

Accepted Answer

Source of data some territories require insurers to submit returns to supervisory bodies/regulators Advantages of using this data Data may be credible Data may be cheap Can use to check position of premium rates compare to others in the market Diadvantages of using this data Relevance questionable, as returns usually used to assess solvency, not price Although possibly credible/cheap, formatting/degree of detail are often issues

Question 14

Collecting data: data sources, other sources - intro List other sources of data an insurer may use for setting assumptions (4)

Accepted Answer

Trade Magazines Actuarial Consultants Overseas Data Rate Table Software

Question 15

Collecting data: data sources, other sources Briefly describe the following other sources of data an insurer can use for setting assumptions Trade Magazines (3) Actuarial Consultants (3) Overseas Data (5) Rate Table Software (3)

Accepted Answer

Trade Magazines national and global source, can perhaps serve as a reasonability check will lack level of detailed breakdown required Actuarial Consultants national and international sources similar to reinsurer's data, however consultants won’t share directly in insurer's risk and reward. will usually charge a fee for service, and can be very expensive Overseas Data may be of credible volume.... ...but different culture, State healthcare, market practice, legislation and policy conditions may also be unreliable Rate Table Software compares market premium rates for similar products of a given class. useful for gathering initial data or checking reasonability and competitiveness again, may not be able to obtain data at the correct level of detail

Question 16

Grouping the data Once we've collected the data necessary for our investigation/to set assumptions, briefly list how grouping is done (2)

Accepted Answer

divide data into relevant homogenous groups subject to adequate levels of data in each cell

Question 17

Adjusting the data Give an overview of adjustments made to the data (3)

Accepted Answer

data may need to be adjusted to meet the requirement of exercise being performed. more accurate allowances for adjustments can be made where insurer's own experience is greater/grows with time unfortunately, the precision isn't always obtainable when adjusting data =\> will need to make use of broad-based ratios to adjust data

Chapter 15 Assumptions (2) Demographic assumptions Flashcards

Describe assumptions that are critical to pricing & valuation: -morbidity -mortality -persistency -claim amount

Brainscape's Knowledge GenomeTM

Chapter 15 Assumptions (2) Demographic assumptions Flashcards

Describe assumptions that are critical to pricing & valuation: -morbidity -mortality -persistency -claim amount

Brainscape's Knowledge Genome^TM