Sources of setting assumptions Flashcards
(8 cards)
Historical data
Likely to be a primary source of data used in determining assumptions about future
experience
- However we know that what happens in the past is not necessarily what will happen
in the future
- This data should be used as a guide together with analysis of any recent trends and
current forecasts for the future
- Can be helpful when choosing demographic assumptions :
➢ Historic levels of mortality in a country, industry or company may help in
setting assumptions for individuals that will survive to receive benefits
➢ This data would have normally been analysed and used to produce graduated
decrement tables
➢ Past data can be used to project future improvements in mortality ,
probability of leaving employment, becoming ill, retiring, being married
➢ Sources of historic data to set these assumptions :
o National statistics
o Life tables compiled by actuaries
o Industry data
o Past info related to particular contract being considered : which may
be from reinsurer, competitors, own company and etc
- Examples of where past data may form a useful starting point for economic
assumptions :
➢ Determining the assumptions for investment returns : dividend yields, or
total returns on different asset classes
➢ Past data on salary levels in particular country, industry or company : useful
for setting salary growth
➢ History of inflation index : determining assumptions for future benefit outgo
related to inflation
Current data and forecasts
➢ Current yields for fixed interest and index linked bonds may provide
indication of market view on future levels of inflation index
➢ Policy statements by governments and controlling banks may also be useful
for estimates of future economic assumptions : price inflation
➢ Scheme sponsor may provide information on planned future salary increases
or likely future rates of withdrawals
➢ Assumptions may be defined by regulation or legislation
Relevance vs credibility of past data
- It is unlikely to be sensible to take an average rate from past data and assume that it
will be appropriate for projecting future experience - Past data simply provides information that may be considered when determining the
most likely future experience - Relevance of past data must be balanced against the need for credible data
Conditions where past data may not reflect future experiences
➢ Benefits level
➢ Underwriting practices
➢ Distribution channel used
➢ Target market
➢ Product design features
o level of sum assured , term of contract, guarantees and options ,
exclusions etc
➢ Underlying mortality rates – medical advances or onset of disease or
pandemic
Things that need to be dealt with concerning past data
- Fluctuations and Changes over time :
➢ Random fluctuations
➢ Abnormal fluctuations
➢ Once-off impacts – pandemics or epidemics
➢ Changes in experience over time - Data Recording:
➢ Changes in the way data is recorded
➢ Potential errors in data - Heterogeneity :
➢ Changes in mix of homogenous groups within the past data
➢ Changes in mix of homogenous groups to which the assumptions apply
Standard Tables (things to consider and disadvantages)
➢ Past data has been analysed on a national or industry level
➢ The most common data for such analyses relates to mortality and morbidity
➢ Country may analyse data based on the whole population’s experience based on
censuses
➢ Disadvantage of census data :
▪ It includes , not just the restricted population that buy insurance contracts
▪ Thus includes lower socio- economic groups that distort the experience of
lives effecting insurance contracts
▪ Increased risk that the data is out of date by the time it is published
➢ When using standard tables, the same considerations are needed as when using
company’s own past experience data :
▪ Whether data is relevant to the intended population at which the product
will be marketed
▪ Whether any adjustments need to be made to the data to reflect
continuation of past historical trends
When determining assumptions: consider the nee for accuracy and prudence
▪ Purpose of the valuation :
o The purpose of which the assumptions will be used and the significance
of each assumption in the overall results need to be considered
o Helps assess the degree of accuracy required and hence to which it is
necessary to remove distortions from data
o It also helps judge whether the assumptions should reflect best
estimate of the future
o Or whether it is appropriate to reflect any uncertainties about future
experience by an overstatement/ understatement within assumptions
▪ Objectives of client to whom model is built
o Affect the level of prudence incorporated within assumptions
▪ Accuracy of Assumptions
o Where the assumptions are used to place a capital value on future
cashflows , it is unnecessary to make adjustments about accuracy of
each assumption
o Asset- liability : requires detailed assumptions relating to the
incidence of future cashflows
o A model to determine the approximate cost of proposed benefit
improvement may only need very broad assumptions
▪ Significance of errors
o Consideration of potential financial significance of errors in the
assumption also helps assess the degree of accuracy required and
extent of margins necessary or level of risk being taken
o Significance depends on potential effects of decisions that will be
based on the results of the modelling exercise
Assumptions likely to have a bigger impact on the premium charged for a term assurance :
between investment return or mortality rate
- Mortality assumption is more significant for term assurance
- Benefit is payable on death and the sum assured is high relative to the premium
- The build up of funds/ provisions is small , especially for a regular premium contract
➢ Effects of Assumptions on cash transactions : - Cases where the payment has to be once-off payment of cash
- Works when determining a fair compensation settlement between parties
- It is important to use the actuary’s best estimate of future experience
- Under- or over-statement will give one party a direct financial advantage at the
expense of the other party - Example: when the sponsor decides to wind up the pension scheme and has to pay
the insurance company now , and this amount has to sufficient to cover all future
benefits , if insurer underestimates, it will make a loss in the future , but if it
overestimates – it may not get the business
