Chapter 15 Demographic assumptions Flashcards
Describe assumptions that are critical to pricing & valuation: -morbidity -mortality -persistency -claim amount
The process of determining demographic assumption entails:
The process of determining demographic assumptions involves: ●
collecting appropriate data – the data would relate to an appropriate period of years, such that the volume of data is adequate, but excessive heterogeneity due to changes over time is not introduced
●
grouping the data – the data would be divided into relevant homogeneous groups, subject to adequate levels of data being retained within each cell; some cells may be grouped into broader homogeneous groups
● ●
calculating the rates – in some cases these will be based on an adjustment to a standard table; in others exposed to risk techniques may be used
adjusting the rates – if the adjusted rates are to apply to a class of lives that is expected to have a different experience from that to which the analysed data relates, then adjustments may need to be made.
Collecting the appropriate data
In most cases, morbidity and mortality parameters will be based on an adjustment to rates, or transition probabilities, from a standard table.
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.
If the company has insufficient data to produce reliable results, or has no appropriate data at all, industry sources, such as the Continuous Mortality Investigation reports and working papers produced in the UK, consultancies or reinsurance companies, might be used instead, if appropriate for the product and parameter in question.
Such data might also be particularly useful for showing trends, since trends in your own data might be down to statistical variation.
Grouping the data
Divide data into relevant homogenous groups subject to adequate levels of data in each cell.
Calculating rates
In some cases rates will be based on an adjustment to a standard table,
- others to exposed to risk techniques may be used.
If the company has adequate data, the adjustment (to the standard table) would be derived by analysing the company’s own experience for the type of contract concerned. Alternatively, the experience of a similar class of business could be used as a substitute.
This alternative may provide appropriate data, depending on the similarity between the contracts concerned.
Using the experience of “similar” contracts as a basis for assumptions also depends on the similarity of the target markets involved.
Adjusting the rates
Adjustments
If the adjusted rates are to apply to a class of lives that is expected to have a different experience from that to which the analysed data relates, then further adjustments may need to be made.
This situation could arise due to a change in target market, distribution channel, or the basis of underwriting and accepting lives. It is worth noting however that, for many classes of health and care risk, no pre-standardised data may exist and the insurer must gather less relevant information from other sources and adapt this to its own risk profile (as described in Chapter 13)
Determining claims incidence rates and recovery rates
- Insurer’s own data is likely to be most relevant source of data
- data should be grouped into homogenous groups subject to credibility
- legislation may restrict use of certain factors.
- 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.
How are claims incidence rates derive for LTCI, CI, PMI ? eg separate rates vary by?
- 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.
What factors are typically used for long-term health & care?
- age
- gender
- smoker status
- occupation
- size of benefit selected
- class of product
- individual or group
- distribution source
- region (for group risks)
formula for calculating incident rates:CI
i(x,t,j) = a(t,j)*i(x,j,0)
where a is the t-year projection factor for disease j.
Demographic assumptions: Mortality
-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.
Demographic assumptions: Lapse rates
- The company’s own data is likely to be the main source of data.
- Market & reinsurers’ data may also be used however population data will no exist.
- Company’s own set of lapse rates depends on distribution methods and after-sale service.
- The commercial and economic environment is important.
- data should be grouped by distribution type.
- Lapse rates are more important when:
- they occur early in the policy term, when a financial loss would be made.
- a surrender value is payable (where a surrender benefit is payable and a reserve has been accumulated would work in insurer’s favour)
- lapse is selective, leaving a worsening propensity to claim amount those remaining
- there is a lapse and re-entry risk
- this occurs if premiums are cheaper at later age therefore policyholders lapse then re-enter at a lower premium. Essentially in-force is still the same but at lower profitability.
Future experience will depend on
- Target market (channel + chosen area)
- Underwriting controls
- Claims controls
- Policy wording
- External environment
The expected future experience of the policyholders will depend crucially on: ●
● However, it can be the case that the regulatory
the target market for the contract – this will be dependent on the distribution channel involved, and the territory (geographical region) chosen
the underwriting controls applied (or not applied) at the start of the policy the claim controls applied (or not applied) at the claim stage
the policy wording, for example under a CI contract where the diseases covered are defined
the expected change in the experience since the time of the last historical investigation to the point in time at which the assumption will on average apply (eg as a result of medical advances).
Other factors
duration since policy entry
duration since start of current benefit, where appropriate (eg for LTCI transition rates to higher benefit levels)
underwriting status (ie whether the life was accepted at standard rates or was subject to special terms).
(i) List the main factors used for subdividing short-term health insurance incidence rate data.
age (age group)
gender
smoker status
occupation
income
class of product (eg PMI, dental plan) cover option (eg comprehensive cover) benefit level (eg level of excess) individual or group
distribution source region
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