Setting Assumptions

Question 1

Factors to consider when setting assumptions

Answer 1

Assumptions
Use
Significance
Consisterly
Need Clients
Legislative and regulations

Question 2

Historical data

Answer 2

*investment data (dividend yields and total returns) - future yield and returns
*index data - inflation
*salary levels
*demographic data - mortality and withdrawal

Question 3

Current data

Answer 3

*yields on government fixed interest vs index linked bonds market inflation levels
*policy statements by government and banks - economic assumptions
*sponsor planned salary increases/withdrawal rates
*regulations or legislation

Question 4

Issues - past data

Answer 4

*credibility - insufficient quantity
*data quality
- trends
- abnormal fluctuations
- random fluctuations
- errors
*Changes
- social, economic, fiscal conditions
- data recordings
- mix of homogeneous groups
*different mix of business

Question 5

Setting assumptions- mortality

Answer 5

1. Values should reflect the expected future experience of lives that will take up the contract
2. Values based on adjustment to mortality rate from std table
3. Adjustment can be derived by analysing company own mortality experience for similar contract
4. Data should be taken from a recent period - long enough but not too long
   5.MAke adjustment for changes in
   - economic conditions
   - target market
   - sales channels
   - underwriting basis used
5. Divide data into relevant homogeneous groups
6. If data is insufficient- indistry/reinsurer

Question 6

Setting assumptions - withdrawal

Answer 6

1. Assumptions should reflect the expected future experience if lives that will take out contract
2. Based on company analysis of that or similar contracts
   - industry/reinsurer
3. MAke adjustment for changes in
   - economic conditions
   - target market
   - sales channels
   - underwriting basis used

Question 7

Setting assumptions - investment return

Answer 7

1. Significance depends on size of investment and any guarantees offered
2. Guarantees will affect investment classes
3. Reinvestment risks - future investment yields - reduce risk by suitable choice of assets
4. Must reflect
   - intended investment mix of contract
   - current return of investment in mix
   - likely future return

Question 8

Setting assumptions- expense

Answer 8

1. Parameter values should reflect expected expenses to be incurred in processing and administration of a contract
2. Based on recent analysis of company experience relating to
   -contract
   -similar contract
   - industry data
3. Expense analysis should give expenses by functions
   - premiums loaded for each function
4. Expense inflation
   - current and expected rates of price and earnings inflation
   -yield differential between fixed interest and index linked government bonds
   - receny actual experience of insurer industry experience

Question 9

Setting assumptions- commission

Answer 9

Take account commission normally paid in market in which products is sold

Question 10

Pricing assumptions - life

Answer 10

1. Mortality
2. Withdrawal
3. Investment return
4. Expenses
5. Commission
6. Reinsurance costs
7. Risk and profit margin
8. Risk discount rate
9. Profit criterion

Question 11

Profit criterion

Answer 11

1. NPV
2. IRR
3. Discounted payback period
4. Ratio