Ch21: Setting assumptions (1) Flashcards
1
Q
Basic method for setting assumptions
A
- investigate the historical experience and make best estimates of the parameters from that experience.
- consider what the conditions will be like in the future period for which you are making your assumptions
- determine what the best estimates of your assumptions will be given the expected future conditions
- the extent to which you would rely on the experience data, and the extent to which you allow for other factors, including judgement, depends on the credibility and relevance of the data, and how predictable the parameter is
- best estimates may need to be adjusted to include a margin for prudence
2
Q
What will expected future mortality depend on?
A
- the target market for the contract
- the underwriting controls applied
- the expected change in experience since the time of the last historical investigation to the point in time at which the assumption will on average apply
3
Q
Advantages of using reinsurer data/statistics
A
- reinsurers have access to mortality experience of many direct writers
- sometimes theirs may be the most relevant data available
- most likely to be the case for a relatively new life company which will have little data of its own
4
Q
Disadvantages of using reinsurer data/statistics
A
- they relate to a large number of companies. Each of these companies will have their own target market and underwriting procedures
- in some cases, the reinsurer may have little or no suitable data
- if the reinsurer’s technical assistance forces you to reinsure more than you would otherwise choose to do, the cost of the extra reinsurance is a problem
5
Q
Several approaches to determining future rates of mortality improvement
A
often used in combination
- expectation approaches
- extrapolation approaches
- explanatory approaches
6
Q
Expectation approaches
A
- involve expert opinion and subjective judgement to specify a range of future scenarios
- advantage is that it can implicitly include all relevant knowledge
- expectations can be subject to bias
7
Q
Extrapolation approaches
A
- based on projecting historical trends in mortality into the future
- such methods also involve some element of subjective judgement
8
Q
Explanatory approaches
A
- attempt to model trends in mortality rates from a bio-medical perspective
- these projections are only effective to the extent that the processes causing death are understood and can be mathematically modelled
9
Q
Data limitations for IP
A
- published insurance parameters for incidence have limited credibility
- worldwide statistics are plentiful, but may not be relevant
10
Q
Difficulty in modelling claim incidence for CI
A
- necessary to estimate theoretically up to 40 different distributions
- might have to establish the trends in experience for each of these different illnesses
- advancements in medical science
- earlier diagnosis
- simpler and more readily available operations
- use of disease-based and treatment-based definitions of claims, which may need to be modelled separately
- guaranteed and reviewable alternatives
- lack of data - CI inurance hasn’t been around long enough
11
Q
Data limitations for LTCI
A
- little data on claim frequency
- an absence of insurance statistics
12
Q
The value assigned to the investment return parameter will depend on
A
- the significance of the assumption on the profitability of the contract
- the extent of the investment guarantee given under the contract
- the extent of any reinvestment risk and extent to which this can be reduced by a suitable choice of assets
- the intended investment mix for the contract
13
Q
How to cope with the risk of expenses that do not vary by size of contract
A
- individual calculation of premium rates or charges
- policy fee addition to the premium or deduction from regular benefit payments - for non unit-linked contracts or charges that match the per-policy expenses for unit-linked contracts
- sum assured differential - for non unit-linked, different premium rates are charged according to which band the benefit requested falls into. For unit-linked contracts, different charges are applied according to which band the premium payable falls into
14
Q
Factors to consider when setting the value of the inflation parameter
A
- current rates of inflation, both for prices and earnings
- expected future rates of inflation
- the differential between the return on government fixed-interest securities and on government index-linked securities
- recent actual experience of the life insurance company or the industry
15
Q
How to allow for the risk of adverse experience
A
- through the risk element in the risk discount rate
- through using a stochastic approach
- through assessing what margins to apply to the expected values
