Chapter 16: Assumptions (3)

Question 1

List 8itemsinfluencingassumptions for average claim amounts(PMI)

Answer 1

salary inflationfor healthcare professionals

medication inflation,including the effects from the development of new drugs

medical equipment inflation,including the effects from medical technology innovations and exchange rates where medical equipment is imported

mix of insured members changes

demandformore expensive medical treatment

prevalence of diseases/ new diseases

future changesin treatment protocols
future charging structure of hospitals and healthcare professionals

Question 2

Why are initial expenses and claim expenses higher for life insurance than for health insurance

Answer 2

Initial expenses are higher:
More underwriting (time and information) needed to assess morbidity
More effort needed to develop policy literature and train sales staff
Healthcare products have to be sold whereas with life insurance the consumer often sees a need for the product

claim expenses are higher:
More underwriting needed to determine the validity of a claim

Question 3

Describe the items to consider when setting the (expense) inflation assumption

Answer 3

allowance should be made for the time between when assumptions are made and when expenses are incurred

current rates of inflation,
expected future rates of inflation,
difference between return on govt fixed-interest bonds and govt index-linked bonds,
recent actual experience of insurer/ industry

should be consistent with investment return assumption

Question 4

Describe the items to consider when setting the investment return assumption

Answer 4

size of reserves,
extent of any reinvestment risk (investment of future premiums) and the extent to which this can be reduced by suitable choice of assets,
intended asset mix and the current expected returns on assets within that mix

investment return assumption may be reduced by allowance for future investment expenses

investment return assumption should beconsistent with inflation assumption

Question 5

List the assumptions for commission clawback on early policy lapse

Answer 5

Theactuary must makeassumptions on:
early lapse rates
proportions of the unearned commission that will be clawbacked

appropriate allowance should be made for the credit risk of the distributor