19 - Models (2) Flashcards
Use of models
How are actuarial models used for decision-making in life insurance management?
Actuarial models support decision-making by projecting cashflows and profits to:
* Price products
* Assess profitability
* Evaluate solvency
* Analyze sensitivities
A full model office projects new and existing business to assess capital needs under adverse scenarios. Key Choice: Stochastic for guarantees, deterministic for simplicity.
Explain how a model determines premiums for a life insurance product.
Models set premiums by:
* Selecting Model Points
* Projecting Cashflows
* Discounting
* Setting Premiums
For an endowment, test ages 30-50, terms 10-20 years, interpolating other rates. Pitfall: Overly old data (e.g., 10 years) misses mix shifts.
Discuss the profit criteria used in pricing and how to choose between them.
Profit criteria evaluate a contract’s profit signature:
* NPV
* IRR
* Discounted Payback Period
A policy with NPV 10% of premiums and 5-year payback beats one with 8% and 7-year payback.
How does marketability influence pricing decisions?
Marketability ensures premiums are competitive, prompting:
* Design Adjustments
* Channel Changes
* Profit Revision
* Go/No-Go
A high-NPV product may fail if premiums exceed market norms, requiring redesign.
How are capital requirements assessed and managed in pricing?
Capital needs are assessed by:
* Scaling Cashflows
* Profitability Check
* Embedded Value Impact
* Management
A capital-intensive product might need shareholder funding if free assets are low.
Explain how return on capital is calculated for a new product.
Return on capital is assessed via:
* Total Capital
* Profit Comparison
£1M capital for £150K annual profit over 10 years gives ~15% return, guiding approval.
How is the profitability of existing business measured?
Profitability is measured as embedded value:
* Present value of future profits (PVFP)
* Method
* Breakdown
* Expectation
Negative PVFP for a product signals re-pricing need.
How is solvency measured in a life insurance company?
Solvency compares assets to liabilities:
* Supervisory Values
* Economic Values
Ensures funds cover existing and future obligations, needing capital beyond reserves.
Compare static and dynamic solvency testing and their uses.
Static: One-time check.
Dynamic: Projects balance sheets forward.
* Deterministic
* Stochastic
Dynamic shows solvency fails in year 7 under low returns, prompting action.
Why is capital needed, and how does the estate contribute?
Need: To withstand shocks, fund new business, enable flexible investments.
Estate: Free assets supporting strain initially, growing with profits.
Excess estate from old profits aids new launches.
How is sensitivity to model point choice addressed?
When Needed: For simplified sets.
Method: Test outputs with varied points.
If 10 vs. 100 points shift NPV by 20%, refine selection.
Explain sensitivity testing for parameters and its purpose.
Purpose: Assess mis-estimation impact, including correlations.
Scenario Testing: Adjust multiple parameters realistically.
A 1% return drop cuts profit 10%, needing buffers.
How can risk be managed beyond the risk discount rate?
Risk Margin: Built into discount rate.
Alternatives: Lower rate or variance analysis.
* Stochastic
* Deterministic
Sensitivity shows withdrawal risk, avoiding stochastic complexity.
Describe the key factors influencing the adequacy of an actuarial model for projecting cashflows to assess profitability.
An adequate model:
* Validity
* Rigor
* Documentation
* Model Points
* Parameters
* Complexity
* Verification
A model omitting guarantees fails validity, skewing profitability.
