More factors to consider when setting assumptions considering past data

Question 1

Relevance and credibility of past data

Answer 1

▪ Past data does not provide the answer as to what will happen in the future
▪ Simply provides information that can be considered when determining the most
likely future experience
▪ This is because social and economic conditions are likely to change over any
period of history
▪ Conditions that could change that will lead to insurance company’s past data
not reflecting likely experience:
- Change in benefits
- Underwriting practices
- Distribution channels used
- Target market
- Product design features
- Underlying mortality rates – due to medical advances or onset of
disease or pandemic

Question 2

Factors of consideration when determine assumptions

Answer 2

• Effects of assumptions on cash transactions
• Implicit assumptions
• Extent to which margins are required – risk and profit margins
• Risk discount rates
• Profit criterion
• Need for accuracy and prudence
• Purpose of the valuation
• Accuracy of assumptions
• ## Significance of errors
• Issues associated with past data
• Abnormal fluctuations
• Random fluctuations
• Changes in the way data was recorded
• Potential errors in data
• Changes in mix of homogenous groups within the past data
• Change sin mix of homogenous groups to which assumptions apply
• Changes in experience over time
  ▪ Changes in fiscal and economic policy / general economic cycle
  ▪ Index used to measure price inflation
  ▪ Other economic adjustments - Changes in taxation
  ▪ Demographic changes
  ▪ Once off-impacts

Question 3

Key factors affecting the choice of assumptions

Answer 3

• The use to which the model will be put
  o Will affect the degree of accuracy needed – best
• The significance of the assumptions
  o Will affect the degree of accuracy needed
• Consistency between assumptions
• Legislative and regulatory requirements
• The objectives of the clients