CH:20 Setting assumptions Flashcards
What are the key factors affecting the choice of assumptions in actuarial models?
- the use to which the model will be put
- the financial significance of the assumptions
- consistency between assumptions
- legislative and regulatory requirements
- the needs of the client
What are the sources of data?
- Internal data
- national statistics
- industry data
- actuarial tables
- reinsurers data
When using past data, the actuary needs to consider how to deal with and make adjustments for?
- abnormal fluctuations
- changes in the experience over time
- random fluctuations
- change in the way in which the data has been recorded
- potential errors in the data
- changes in the mix of homogenous groups within past data
- change in the mix of homogenous groups to which the assumptions apply
What does the relationship between current yields on fixed interest and index-linked bonds indicate?
future expected inflation
Is industry data suitable for insurance companies
Yes, but needs to used with care, checking whether it reflects the target market and adjusting for trends
What are margins (with reference to assumptions in pricing)
margins is a buffer to guard against adverse future experience and to allow for profit
What is the risk discount rate made up of?
sum of either the risk-free rate of return or the shareholders required rate of return plus a risk premium
What features can make contract design riskier?
- lack of historical data
- high guarantees
- policyholder options
- overhead costs
- complexity of design
- untested market
What methods are used to calculate a profit criterion?
- NPV
- IRR
- discounted payback period
