Chapter 15 Demographic assumptions

Question 1

The process of determining demographic assumption entails:

Answer 1

• Collecting appropriate data
• grouping the data
• calculating the rates
• adjusting the rates

Question 2

Collecting the appropriate data

Answer 2

• 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 3

Grouping the data

Answer 3

• divide data into relevant homogenous groups

- subject to adequate levels of data in each cell

Question 4

Calculating rates

Answer 4

• in some cases rates will be based on an adjustment to a standard table,
• others to exposed to risk techniques may be used

Question 5

Adjusting the rates

Answer 5

• adjustments are made if a class of lives are expected to have experience different to that which observed from the data.
• this could occur due to a change in the target market or distribution channel.
• in most cases morbidity, mortality parameters will be based on an adjustment to rates from a standard table.

Question 6

Determining claims incidence rates and recovery rates

Answer 6

• Insurer’s own data is likely to be most relevant source of data
• data should be grouped into homogenous groups subject to credibility
• legislation may restrict use of certain factors.
• Allowance should be made for trends. Key social & economic influences include:
• changing attitudes to health
• State benefits
• economic situation/wellbeing of the country
• high inflation will impact renewal premiums
• medical advance should be allowed for in the rates.
• claim amount assumptions are important for indemnity cover.
• Claim recovery rates are important under LTCI benefit will cease if policyholder recovers form sickness.

Question 7

How are claims incidence rates derive for LTCI, CI, PMI ? eg separate rates vary by?

Answer 7

• single rates will be derived for LTCI
• Separate rates for different illnes for CI insurance eg heart attack, cancer, stroke, TPD, etc
• combining these separate rates is not appropriate for tiered benefits
• different claim incidence rates for different treatments for PMI.

Question 8

What factors are typically used for long-term health & care?

Answer 8

• age
• gender
• smoker status
• occupation
• size of benefit selected
• class of product
• individual or group
• distribution source
• region

Question 9

formula for calculating incident rates:CI

Answer 9

i(x,t,j) = a(t,j)*i(x,j,0)

where a is the t-year projection factor for disease j.

Question 10

Demographic assumptions: Mortality

Answer 10

-Mortality rates should be taken from recent experience of a credible body of policyholder for same contract.

• The process of deriving mortality assumptions is similar to that of deriving claim incidence and recovery rates.
• Mortality rates are important for:
• claims in payment under LTCI
• for accelerated CI insurance
• within the survival period for stand-alone CI insurance

-For claims in payment, the mortality assumption is less important pre-claim, unless a significant death benefit is provided.

Question 11

Demographic assumptions: Lapse rates

Answer 11

• The company’s own data is likely to be the main source of data.
• Market & reinsurers’ data may also be used however population data will no exist.
• Company’s own set of lapse rates depends on distribution methods and after-sale service.
• The commercial and economic environment is important.
• data should be grouped by distribution type.
• Lapse rates are more important when:
• they occur early in the policy term, when a financial loss would be made.
• a surrender value is payable (where a surrender benefit is payable and a reserve has been accumulated would work in insurer’s favour)
• lapse is selective, leaving a worsening propensity to claim amount those remaining
• there is a lapse and re-entry risk
• this occurs if premiums are cheaper at later age therefore policyholders lapse then re-enter at a lower premium. Essentially in-force is still the same but at lower profitability.

Question 12

Future experience will depend on

Answer 12

• Target market (channel + chosen area)
• Underwriting controls
• Claims controls
• Policy wording
• External environment