Ch 17: Other assumptions

Question 1

Business mix - categories to monitor and consider

Answer 1

• Average policy size
• Split by product
• Split by distribution channel
• Split by territory
• Split by gender
• Split by age
• Split by socio-economic status, income or occupation
• Split by health status
• Split by new and renewal business

Question 2

Factors that make a product design riskier from an investment point of view (will affect risk discount rate)

Answer 2

• Lack of historical data
• High guarantees
• Policyholder options
• Overhead costs
• Complexity of design
• Untested market

Question 3

Methods to measure statistical risk of cashflows (i.e. uncertainty of the cashflows)

Answer 3

• Analytically, by considering the variances of the individual parameters used
• Sensitivity analysis (deterministically assessed variations in parameter values)
• Stochastic modelling for some or all parameter values and simulation
• Comparison with any available market data

Question 4

Allowing for product specific risk in modelling exercise

Answer 4

• Risk discount rate (determined with CAPM)
• Market consistent valuation (risk neutral approach)