14. Assumptions (1) - General Considerations

Question 1

General considerations when setting assumptions

Answer 1

• use to which assumptions will be put
• particular care given to assumptions with most financial significance
• assumptions should be consistent
• legislative and regulatory constraints
• needs of the client
• ensure parameters are produced accurately from the data
• ensure data used to derive assumptions relevant to insured lives
• ensure bases used are flexible to reflect changing risk circumstances

Question 2

General process for setting assumptions

Answer 2

1. Investigate historical experience and make best estimates of parameters
2. Consider what future conditions will be
3. Determine best estimate of assumptions, given expected future conditions
4. Best estimates may need to be adjusted to include margin for prudence

Question 3

Assumptions for health and care insurer

Answer 3

Demographic assumptions
- Claim incidence rates (PMI, CI, LTCI)
- transition probabilities (LTCI)
- mortality rates
- lapse rates

Financial assumptions
- benefit amount and benefit inflation
- expenses and expense inflation
- commission and clawback
- investment return
- taxes

Other assumptions
- new business volume and mix
- reserving and capital requirement
- risk discount rate
- profit criteria

Question 4

Assumptions for pricing

Answer 4

If cashflow model is used, the risk of adverse experience may be allowed for:
- margins
- stochastic approach
- risk element of the risk discount rate

Ultimate price for the contract depends on
- competitive nature of product
- company unique selling proposition
- credibility, accuracy, relevance, how up-to-date the data is
- size of company free assets/ parental guarantee

Question 5

Assumptions for reserving

Answer 5

Company carries out valuation to: demonstrate solvency to regulator, use in published reports, internal valuation to give realistic idea of exact position of company

General principles
- starting point is a BE basis for the assumptions
- margins applied

Published accounts
- consistent with legislation and accounting principles governing accounts
- whether accounts produced on going-concern/ break-up basis
- whether they are required to give a true and fair view
- whether there is any legislation or guidance on the basis/ assumptions to use

Solvency accounts
- rules governing these may or may not be same as those that apply to the published accounts

Question 6

Assumptions for assessing profitability of existing business - EV

Answer 6

EV - most relevance to LT insurance

EV: PV(Future shareholder profits in respect of existing business) + release of shareholder-owned net assets

• recognises the value of any assets in excess of reserves and the value to shareholders of future releases of margins in those reserves

Question 7

Reasons for calculating EV

Answer 7

• establish value of business, for internal management accounts/ information
• include in published financial statements
• appraisal value calculation (sale/ purchase)
• analyse value of future surpluses for reinsurance EV financing

Question 8

Assumptions - EV

Answer 8

Key determinant in deciding on an EV basis is the purpose for which EV is calculated
- we need a reserving basis, projection basis
- need to know reserves now to calculate net assets (assets - reserves)
- always calculate reserves on supervisory reserving basis
- need a projection basis to project experience into future - has no impact on shareholder-owned share of net assets