Chapter 18 & 19 - Models Flashcards
Requirements of a good model: (9)
- Model must be valid, rigorous and adequately documented
- Model points must represent the business accurately
- Model must incorporate all the material features of the business
- The parameter values must be set appropriately
- Different variables should behave realistically relative to each other
- The workings of the model must be easy to explain and understand
- Results should be clearly displayed, verifiable, and communicable to intended recipients
- Model should not be overly complex
- Model should be capable of subsequent development and refinement
What is a model point?
It is a data record that is fed itno the computer as an input for the modelling program. It will represent either a policy or group of policies, containing data on the most important characteristics of the policy
Factors influencing the number of model points chosen? (8)
- Availability and power of computers
- Variability of contracts sold
- Complexity of contracts in force
- Age of the company
- Whether the model is stochastic or deterministic
- Importance of investigation
- Time available
- Sensitivity of the results to using more or fewer model points
4 types of models used by LI:
- Single policy profit test model
- New business model
- Existing business model
- Full model office (sum of 2&3)
Desirable features of a stochastic model as compared with a deterministic model: (3)
- Method allows a probability distribution to be assigned one or more of the unknown future parameters
- Positive liability can be calculated where a deterministic approach might otherwise produce a zero liability, eg, where CF includes a minimum guaranteed benefit
- Future paramaters may be assumed to vary together as a dynamic set, which is particularly useful for modelling with-profit business
Circumstances when deterministic approach may be appropriate: (2)
- Actuary is satisfied that similar results could be obtained as if a full stochastic projection was used, eg possible ourcomes form a symmetric distributionand information is only required on the expectation, or if a specific scenario is being tested within a simple cashflow model
- A quick, independent test is required to see that the results of a stochastic projection are reasonable
The risk discount rate allows for: (2)
- Return required by the company
- Level of statistical risk attaching to the CFs under the particular contract.
What is a profit criterion?
It is a single figure that tries to summarise the relative efficiency of contracts with different profit signatures
Proft criterion that could be used: (3)
- Net present value
- Internal rate of return
- Discounted payback period
Net present value is more realistic than internal rate of return in some cases: (3)
- If there is more than one change of sign in stream of profits in the profit signature, the IRR will not usually be unique
- NPV can be related to usefull indicators of the policy’s worth to the company, ito sales effort or market share. Can not be done with IRR
- If a policy makes profits from the outset then the IRR may not even exist. NPV always exist
Disadvantages of writing capital intensive business: (5)
- Could lead directly to a problem with supervisory solvency
- Would reduce company’s apparent financial strength
- Represents an opportunity cost, in that the company could use the same amount of capital to write more business which is less capital intensive
- Could lead unexpectedly to a problem with supervisory solvency if the company sells much more of the business than anticipated
- Company will be less at risk to adverse experience if it uses capital to finance a large number of non-capital intensive policies than if it uses it for a smaller number of more capital intensive policies
What is the estate of a life company?
The excess of the realistic value of its assets over the realistic value of its liabilities
