Chapter 12.2 Assumptions (1) Demographic assumptions Flashcards
Describe assumptions that are critical to pricing & valuation: -morbidity -mortality -persistency -claim amount
Briefly describe a common framework which can be used to drerive assumptions (5)
(demographic assumptions)
- Investigate past experience; make past best estimate parameters; appropriate in context of historical conditions/then-circumstances
- Consider future conditions (including commercial and economic environment ) during period for which assumptions will be used
- Determine future best estimates assumptions, given expected future conditions
- Extent of (a) relying past data vs (b) allowing for other factors, depends on data credibility/relevance + parameter’s predictability
- Adjust best estimates with margin. Size of margin depends on:
- purpose for which model is required
- degree of risk associated with parameter
Main demographic assumptions
List some of the main demographic assumptions for health care contracts (5)
- PMI Incidence Rates
- Critical Illness Incidence Rates
- Long-Term Care Transfer Probabilities (incidence and benefit amount)
- Other claim inception rates
- Persistency rates are also important for health care insurance conracts
Key steps within framework for deriving demographic assumptions:
Briefly list key steps to be taken when deriving demographic assumptions, given the common framework used to set assumptions (5)
- collect appropriate data
- grouping data
- adjusting the data
- calculate the rates
- adjusting the rates
List key requirements to be satisfied for the data used when setting assumptions (7)
Key data requirements: data should be
- relevant (similar class of lives to that being insured)
- credible (sufficient volume to draw conclusions/remove random flactuations)
- reliable
- readily available
Consideration should also be given to
- the cost and suitability of the data given the purpose for which the eventual assumptions will be used
- the extent of need to adjust data for credibility and relevance
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Collecting appropriate data for assumptions
What conflicting aspects exist between the period of time with respect to which data is collected*, and the *volume of data used for setting assumptions? (2)
2 important points regarding data used for assumptions
- data would relate to an appropriate period of year, such that volume is adequate..
- …but excessive heterogeneity due to changes over time is not introduced
List various data sources which can be used for setting demographic assumptions (5)
Data sources
- Own data
- Population data
- Reinsurer data
- Market data
- Other sources
Collecting data: data sources, own data
Briefly touch on the use of the insurer’s own data for setting assumptions in terms of
- relevance (4)
- how own data ranks compared to other data sources (3)
- volumes of data (2)
- limitations of using own data (2)
Own data is highly/most relevant in terms of
- underwriting approach,
- policy condition,
- claims management and
- distribution channel
Own experience is best case.
- cost, reliability and format are not issues
Volume
- may not be sufficient for credibility, particularly for risk cells.
- may need adjustment
Limitations
- for brand new entrants into market, there will be limited own data, and so such insurers will have to be totally reliant on external sources
Collecting data: data sources, population data
Briefly touch on the use of population data for setting assumptions in terms of
- where the data may come from and a key point related to population data (1)
- advantages of using population data (4)
- disadvantages of using population data (6)
How population data may arise and a key point related to it:
- government may periodically produce analysis of healthcare experience for population
- key point related to population data: for some risk cells, it may be the data available to form a starting point for assumption setting
Advantages:
- readily available,
- often free.
- usually high volume and credible
Disadvantages:
- Nation data may not be relevant to insured lives. Better if data is split by groups, regions, age
- Insured population may behave/utilise differently to national population (i.e. utilise more)
- Sickness and incapacity definitions will be different to ‘claim’ definitions in policy
- Accuracy and reliability may be questionable, especially where definitions are subjective. Scope for double counting is enormous
- Data may not be available electronically, or in an appropriate format
- May be out of date before it is even published
Collecting data: data sources, reinsurer data
Briefly touch on the use of reinsurer data for setting assumptions in terms of
- how the insurer would gain access to reinsurer data (1)
- advantages of using reinsurer data (3)
- disadvantages of using reinsurer data (5)
How does insurer gain access to reinsurer data?
- Reinsurer may have data as part of its services offered to insurer
Advantages
- There is motive for reinsurer data to be as accurate/fair as possible since profits under reinsurance treaty depends on calculated premiums
- Reinsurers draw information from other companies, and other countries. Excellent for launching new product lines. Will usually provide data as part of a contract
- Credibility will vary, but more credible than insurer’s own data
Drawbacks/important points
- Will need to consider divergence of own future experience from reinsurer data and adjust accordingly
- Differences could arise due to differing claims definitions, claims management processes, underwriting processes, etc
- The use of reinsurance comes at a cost;
- eg reinsurer will likely provide data in return for share of insurer’s business
- this will need to be factored into the choice of using reinsurer data and whether is is worthwhile
Collecting data: data sources, market data - intro
What kind of market data may an insurer use to set assumptions? (2)
- insured lives data (industry data)
- returns to an insurer supervisor/regulator
Collecting data: data sources, market data - insured lives/industry data
Briefly touch on the use of the market data (insured lives data) for setting assumptions in terms of
- how this data may arise/be obtained (2)
- in terms of credibility and relevance, how does this data source compare to insurer’s own data and population data? (2)
- advantages of using this data (6)
- drawbacks of using this data (4)
Insured lives data (aka industry data)
- may come/be obtained as a result of an agreement between insurers to pool claims and policy statistics for industry-wide collection. E.g. CMI in UK
- sometimes form the basis of mortality tables
Biggest considerations/issues:
- more credible than insurer’s own data, but less relevant.
- more relevant than population, but less credible
Advantages:
- usually compiled by experts
- highly credible and may be of sufficient volume
- represents insured experience (as opposed to, eg national stats, which include experience of non-insured lives)
- should reflect local companies and market practices within which insurer likely operates…
- …benefits all, as individual companies may get an analysis/comparison of their own experience compared to market
- national relevance
Drawbacks:
- relvance questionable, as only represents a market average, not relevant to any one company
- policy conditions, underwriting and claims management may differ
- may take years for sufficient data to accumulate, depending on level of participation of various market participants
- industry wide data may be very limited; usually available for long term business classes (LTCI, CI), but not for short term (PMI)
Collecting data: data sources, market data - returns to an insurance supervisor
Briefly touch on the use of the market data (insured lives data) for setting assumptions in terms of
- how this data may arise (1)
- briefly list advantages of using this data (3)
- brielfy list disadvantages of using this data (2)
Source of data
- some territories require insurers to submit returns to supervisory bodies/regulators
Advantages of using this data
- Data may be credible
- Data may be cheap
- Can use to check position of premium rates compare to others in the market
Diadvantages of using this data
- Relevance questionable, as returns usually used to assess solvency, not price
- Although possibly credible/cheap, formatting/degree of detail are often issues
Collecting data: data sources, other sources - intro
List other sources of data an insurer may use for setting assumptions (4)
- Trade Magazines
- Actuarial Consultants
- Overseas Data
- Rate Table Software
Collecting data: data sources, other sources
Briefly describe the following other sources of data an insurer can use for setting assumptions
Trade Magazines (3)
Actuarial Consultants (3)
Overseas Data (5)
Rate Table Software (3)
Trade Magazines
- national and global source, can perhaps serve as a reasonability check
- will lack level of detailed breakdown required
Actuarial Consultants
- national and international sources
- similar to reinsurer’s data, however consultants won’t share directly in insurer’s risk and reward.
- will usually charge a fee for service, and can be very expensive
Overseas Data
- may be of credible volume….
- …but different
- culture, State healthcare, market practice, legislation and policy conditions
- may also be unreliable
Rate Table Software
- compares market premium rates for similar products of a given class.
- useful for gathering initial data or checking reasonability and competitiveness
- again, may not be able to obtain data at the correct level of detail
Grouping the data
Once we’ve collected the data necessary for our investigation/to set assumptions, briefly list how grouping is done (2)
- divide data into relevant homogenous groups
- subject to adequate levels of data in each cell
