Chapter 17 Assumptions (4) : Other assumptions Flashcards
Describe other assumptions crucial to pricing and valuation.
New business volume
- New business volume should be assessed in order to choose per-policy contribution to cover fixed expenses,
- and to judge adequacy of capital to support new sales.
- ie.launch a new product.
New business mix
- Any cross-subsidies in pricing basis will create a risk that business mix is not as expected.
- by choosing an average assumption over a group of policies an insurer lays itself open to anti-selection if more higher risk policies are in force.
- this will occur if a competitor uses more detail and takes all the lighter risks, leaving other insurers with heavy risks.
Assumptions may be needed for mix of business by?
- average policy size
- product type
- distribution channel
- territory
- age and gender
- socio-economic status, income or occupation
- health status
- new and renewal business
Where does average policy size fit in business mix?
- used for allocation of expenses eg sum insured
- average policy size may be linked to socio-economic profile of target market.
Business mix: Split by product
- enables indirect expenses to be allocated correctly by contract.
- allocation of SCR within pricing calculations.
Business mix:Split by distribution channel
- where healthcare insurance products are priced uniformly but sold through different channels, projections by each channels are needed.
- this is important where commission levels paid are actually different to those assumed in pricing basis,
Business mix:split territory
- healthcare can vary substantially by territory
- the actuary may use territory as a rating factor
Business mix: Split by gender
- some lines, the market practice may prohibit the use of this factor in pricing healthcare
- morbidity risk will almost certainly vary by gender and thus the actuary will need estimates of relative numbers & sizes so that the correct unisex price is charged.
Business mix: Split by age
-Market practice may dictate insurers may not discriminate by gender in pricing some health product lines.
Business mix:Split by socia economic status, income or occupation
- this might increase propensity to claim
- therefore insurer must monitor this mix to ensure adequate premium can be charged over whole portfolio.
Business mix: Split by health status
-in some countries insurers are prohibited from discriminating by health status. i.e. use it in underwriting
Business mix: Split by new and renewal business
- renewed annually
- there is no differentiated pricing for new and renewal business due to marketing pressures.
- if an insurer charged higher premiums for new business then new business volumes might be lower.
- therefore they should monitor this split to ensure premiums are adequate across whole portfolio.
The risk discount rate should reflect ?
- return required by company’s shareholders
- level of statistical risk attaching to the cashflows under consideration (for the specific project)
The shareholders’ return is made up of?
- return they could obtain from a risk-free asset
- a risk premiums to compensate the them for investing in the insurance company
- risk premium may be quantified using CAPM.
- it is not up to the actuary to decide an appropriate return, they will however make some reasonable assumptions based on the market.
Statistical risk attaching to the cashflows will depend on?
- Level of statistical risk depends on the product
- The factors affecting the riskiness of a product include:
- lack of historical data
- high guarantees
- policyholder options
- overhead costs
- complexity of design
- untested market
