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Flashcards in F_Extras 2 Deck (20)
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1
Q

Factors in product design

Regulatory Requirements

A

Must adhere to regulatory requirement and keep abreast of potential changes.

Some factors are not independent and compromises are needed, e.g. between competitiveness and profitability.

2
Q

Gross Premium Valuation (GPV)

A

PV of future Benefits +
PV of future Expenses -
PV of future Office Premiums =

GPV Reserve

3
Q

Types of Reserves

A
Unit Reserve (UR)
Non-Unit Reserve (NUR)
Can be negative 
Negative allowed if 
		UR + NUR > 0
		Future profits emerge in time to repay
		Total NUR’s > 0
4
Q

Features of GPV

A
Explicit allowance for expenses 
Premiums valued are office premiums
Pricing vs valuation basis immediately emerges as profit/loss
Initially reserves may be negative
Sensitive to change in basis
5
Q

Net Premium Valuation (NPV)

A

PV of future Benefits+
PV of future Net Premiums =

NPV Reserve

Net Premium = Premium required on valuation basis that will provide contractual benefits offered at start

6
Q

Data Checks

A

Data Reconciliation
Consistency
Analysis of Surplus and Analysis of Embedded Value
Unusual Values and Spot Checks

7
Q

Existing Business Profitability

A

EV techniques
Calculate present value of future profits at RDR
Whole book or suitable model points (scaled up)

8
Q

Experience analysis

A

Analysis
Mortality
Withdrawal
Expense

9
Q

Experience Analysis

Expenses: Process

A

Process

Determine expenses, subdivide, allocate proportionally, once-off considerations, exceptional expenses, reconcile

10
Q

You are the statutory actuary of a small, new, life insurance company operating in a country with a developed life insurance market. Your company only writes conventional life insurance business. You are responsible for setting all of the assumptions for the valuation. The Managing Director is concerned about protecting the future profitability of the business, and in particular is concerned about the risk associated with inaccurate valuation assumptions.
Explain what you may be able to do (other than through the use of reinsurance) to remove as much of the risk associated with the possibility of the company’s actual experience differing from the valuation assumptions as possible, and what problems you might encounter in trying to do this. [10]
Investment return:

A

Investment return:
• Transfer the assumption risk to an outside party, e.g. by purchasing investments with guaranteed investment returns.
• If the company uses these for investments, you can fix the assumption to match the investment returns that are guaranteed and the risk around this assumption is removed.
• If the products have investment guarantees additional assumptions will be required, e.g. likelihood of guarantee biting.
• Investment guarantees could be removed from the product design where possible, e.g. selling with profit rather than non-profit products.

Problems:
• Investing in assets with guaranteed benefits may not provide the highest expected returns.
• It might not be possible to radically change product design in this way.

11
Q

How to value an option or guarantee (2 ways)

A

Option pricing technique

Stochastic simulated investment performance

12
Q

Give 3 common mortality options

A
Additional benefit purchase without need for further health evidence
Renewable policy (no further health evidence)
Convertible policy - change part of SA from one contract to another
13
Q

Why use T’s and C’s for mortality options, explain what it means for premium rates

A

Reduce anti-selection

ie. Those in poor health using option to get large amounts of life insurance at rates not reflecting their condition

14
Q

Give some T’s and C’s examples for mortality options

A

Timing - fixed take up times
Birth child
Salary increase
SA(additional)<=SA(original)

15
Q

Explain the cost of a mortality option

A

Difference between price should have charged given full underwriting information and price actually charged

16
Q

What 2 assumptions over the normal pricing basis are needed to value a mortality option

A

P(option exercised)

qx of those who take-up option

17
Q

How to get the EPV of cost of mortality option

A

EPV(ben) - EPV (prem)

18
Q

Why is the conventional method the preferred choice in mortality option pricing?

A

NA requires double decrement tables
Difficult to obtain such data
NB won’t have it

19
Q

What mortality assumptions are made in the North American method?

A

EPV(B) assumes lives not taking up option are Ult. Meaning average mortality is higher than Ult.
OR
Average mortality for all lives is Ult, change mortality of those who don’t take up to reflect

20
Q

What assumptions underly the conventional method?

A

All lives eligible to take up option will do so

Mortality of those taking up option is Ult version of Select of those joiners