Chapter 15 Demographic assumptions

Question 1

The process of determining demographic assumption entails:

Answer 1

• Collecting appropriate data
• grouping the data (into risk cells)
• calculating the rates. (For each cell)
• adjusting the rates

MM side note for context: demographic has to do with structure of population so these are the assumptions that relate to the population of insured lives

Question 2

Collecting the appropriate data

Answer 2

• 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

Question 3

Grouping the data

Answer 3

• divide data into relevant homogenous groups

- subject to adequate levels of data in each cell

Question 4

Calculating rates

Answer 4

• in some cases rates will be based on an adjustment to a standard table,
• for others exposed to risk techniques may be used

Question 5

Adjusting the rates

Answer 5

• adjustments are made if a class of lives are expected to have experience different to that which observed from the data.
• this could occur due to a change in the target market or distribution channel.
• in most cases morbidity, mortality parameters will be based on an adjustment to rates from a standard table.

Question 6

Determining claims incidence rates and recovery rates

Answer 6

collect appropriate data
- Insurer’s own data is likely to be most relevant source of data

group data
- data should be grouped into homogenous groups subject to credibility
- legislation may restrict use of certain rating factors for pricing.

calculate rates

adjust rates
- Allowance should be made for trends. Key social & economic influences include:
- changing attitudes to health
- State benefits
- economic situation/wellbeing of the country
- high inflation will impact renewal premiums

• medical advance should be allowed for in the rates.
• claim amount assumptions are important for indemnity cover.
• Claim recovery rates are important under LTCI benefit will cease if policyholder recovers form sickness.

Question 7

How are claims incidence rates derived for LTCI, CI, PMI ? eg separate rates vary by?

Answer 7

• single rates will be derived for LTCI
• Separate rates for different illnes for CI insurance eg heart attack, cancer, stroke, TPD, etc
• combining these separate rates is not appropriate for tiered benefits
• different claim incidence rates for different treatments for PMI.

Question 8

What risk factors are typically used for long-term health & care?

Answer 8

• age
• gender
• smoker status
• occupation
• size of benefit selected
• class of product
• individual or group
• distribution source
• regional

Question 9

formula for calculating incidence rates:CI

Answer 9

i(x,t,j) = a(t,j)*i(x,j,0)

where a is the t-year projection factor for disease j.

Question 10

Demographic assumptions: Mortality rates

Answer 10

-Mortality rates should be taken from recent experience of a credible body of policyholder for same contract.

• The process of deriving mortality assumptions is similar to that of deriving claim incidence and recovery rates.
• Mortality rates are important for:
• claims in payment under LTCI
• for accelerated CI insurance
• within the survival period for stand-alone CI insurance

-For claims in payment, the mortality assumption is less important pre-claim, unless a significant death benefit is provided.

Question 11

Demographic assumptions: Lapse rates

Answer 11

Change in:

• Dbn channel (financial sophistication, price sensitivity, economic class, information asymmetry ( right prod for right client), distributor behaviour, diff sales method i.e pressure)
• Economic conditions, especially those affecting employment
• Availability of State HC benefits
• Sales method (whether bought under pressure)
• Target market
• Territory i.e. diff country
• Product design eg options, dfns
• Policy wording
• Benefits provided
• Price
• Competitiveness
• Stds of customer service
• UW practices
• Claims handling practices

Question 12

14 factors that might make lapse rates change in future (Q15.13)

Answer 12

Change in:
- Economic conditions, especially those affecting employment
- Availability of State HC benefits
- Dbn channel (financial sophistication, price sensitivity, economic class, information asymmetry ( right prod for right client), distributor behaviour, diff sales method i.e pressure)
- Sales method (whether bought under pressure)
- Target market
- Territory i.e. diff country
- Product design eg options, dfns
- Policy wording
- Benefits provided
- Price
- Competitiveness
- Stds of customer service
- UW practices
- Claims handling practices