CH 17 (WM) Flashcards
Describe how the actuary will use the assumptions for New Business volumes. [1.25]
- New business volume should be assessed in order to choose per-policy contribution to cover fixed expenses, ✓✓
- and to judge adequacy of capital to support new sales. ✓✓
- i.e.launch a new product. ✓
(for each answer, state to do what)
Describe the risk faced w.r.t. new business mix. [1.5]
- Any cross-subsidies in pricing basis will create a risk that business mix is not as expected.✓✓
- by choosing an average assumption over a group of policies an insurer lays itself open to anti-selection if more higher risk policies are in force.✓✓
- this will occur if a competitor uses more detail and takes all the lighter risks, leaving other insurers with heavy risks.✓✓
Main issue here is the risk of anti-selection.
Assumptions may be needed for mix of business by? [3]
- Type of product ✓
- Average policy size ✓
- Sex and Age ✓✓
- Distribution channel ✓
- SEC status, income or occupation ✓✓
- Territory ✓
- Health status ✓
- New and renewal business ✓✓
Where does average policy size fit in business mix? [1]
- used for allocation of expenses, eg sum insured ✓✓
- average policy size may be linked to socio-economic profile of target market ✓✓
Why do the actuary need to make assumptions for the “split by product”? [1]
- enables indirect expenses to be allocated correctly by contract ✓✓
- allocation of SCR within pricing calculations ✓✓
allocation of… (x2)
Why do the actuary need to make assumptions for the “split by distribution channel”? [1]
- Where healthcare insurance products are priced uniformly but sold through different channels, projections by each channels are needed.✓✓
- This is important where commission levels paid are actually different to those assumed in pricing basis.✓✓
Why do the actuary will need to make assumptions for the “split by territory”? [1]
- Health risk can vary substantially by territory and even significantly between different regions within one country. ✓✓
- The actuary may use territory as a rating factor. ✓✓
Why do the actuary will need to make assumptions for the “split by gender”? [1.5]
- In some territories and for some lines✓, the market practice may prohibit the use of this factor in pricing healthcare.✓✓
- Morbidity risk will almost certainly vary by gender✓ and thus the actuary will need estimates of relative numbers & sizes so that the correct unisex price is charged.✓✓
Why do the actuary will need to make assumptions for “split by age”? [1.25]
Market practice may dictate insurers may not discriminate by age in pricing some health product lines. ✓✓
Health risk increases with age, ✓ and thus the actuary will need to estimate the age distribution by cover option so that accurate uniform age prices can be charged. ✓✓
Why do the actuary will need to make assumptions for “split by SEC status, income or occupation”? [1]
- this might increase propensity to claim ✓✓
- therefore insurer must monitor this mix to ensure adequate premium can be charged over whole portfolio. ✓✓
Why do the actuary will need to make assumptions for “split by health status”? [2]
- In some countries insurers are prohibited from discriminating by health status✓✓, i.e. use it in underwriting.✓
- Health status, particularly chronic conditions✓, will impact on the risk of the PH✓, and the actuary will need to estimate the prevalence of chronic conditions amongst PHs✓ by cover option so that accurate prices can be charged.✓✓
Why do the actuary need to make assumptions for “split by new and renewal business”? [2.25]
- ST policies, e.g PMI are usually renewed annually.✓✓
- The renewal costs are likely to be lower than the cost of writing NB.✓✓
- However, premiums are rarely differentiated for new and renewal business due to marketing pressures.✓✓
- i.e. if an insurer charged higher premiums for new business then new business volumes might be lower.✓✓
- Therefore they should monitor this split to ensure premiums are adequate across whole portfolio.✓
Define the term “risk-free” asset. [1]
It is an asset that offers a certain return, absolutely free from all risk of default.✓✓
Risk free assets are sometimes taken to be government bonds in stable countries.✓✓
The risk discount rate should reflect ? [1]
- return required by company’s shareholders ✓✓
- level of statistical risk attaching to the cashflows under consideration (for the specific project) ✓✓
The shareholders’ return is made up of? [2.5]
- The return they could obtain from a risk-free asset. ✓✓
- A risk premium to compensate them for investing in the insurance company. ✓✓
- A suitable proxy can be chosen to represent risk-free assets, such as ST deposits issued by a stable government ✓✓
- Risk premium may be quantified using CAPM. ✓✓
- It is not up to the actuary to decide an appropriate return, they will however make some reasonable assumptions based on the market. ✓✓
Statistical risk attaching to the cashflows will depend on? [2.25]
- Level of statistical risk depends on the product.✓✓
- The factors affecting the riskiness of a product include:✓
- lack of historical data✓
- high guarantees✓
- policyholder options✓
- overhead costs✓
- complexity of design✓
- untested market✓
What features in a product might lead to a lower discount rate? [2.75]
- Benefits based on contingencies about which there is a lot of reliable data. ✓✓ *(opposite is lack of historical data) *
- no (or not very onerous) guarantees ✓✓ (opposite is high guarantees)
- no PH options ✓ *(opposite is PH options) *
- low overhead costs since this reduce the risk posed by low business levels ✓✓ (opposite is overhead cost)
- the ability to vary charges in the case of UL contracts. ✓✓
- Simple product design ✓(opposite is complexity of design)
- a well-known market ✓ (opposite is untested market)
State the various methods which could be used to assess the statistical risk. [2]
- In some situations analytically, by considering the mean & variance of parameter values.✓✓
- by using sensitivity analysis, with deterministically assessed variations in the parameter values.✓✓
- using stochastic modelling for some, or all, or the parameter values and simulation.✓✓
- by comparison with any available market data.✓✓
Tip: PARAMETER VALUES appear in each of the first 3 sentences.
Describe the use of a market consistent valuation as an alternative approach to set the discount rate. [2.75]
- These are carried out using risk-free interest rates for discount rates.✓✓
- Swap rates or GBY curves are often used to set risk-free term dependent interest rates.✓✓
- Margins are then included in parameter values, e.g. morbidity and expenses✓✓, to allow for inherent risks in their estimation.✓
- It is also useful as a reasonability check on traditional approaches and ensuring that risk margins are appropriate.✓✓
- It is an alternative to using CAPM to determine the risk-discount rate.✓✓
