Chapter 20 - Setting Assumptions

Question 1

Assumption Setting

Answer 1

As in all actuarial work, when setting assumptions it is important to:
- consider the use to which the assumptions will be put
- take care over the choice of the assumptions that will have the most financial significance
- achieve consistency between the various assumptions
- consider any legislative or regulatory constraints
- consider the needs of the client

Demographic assumptions, e.g. mortality rates, relate to the size and distribution of the population. They generally affect the timing or number of the cashflows.

Economic assumptions, e.g. investment returns, relate to the level of income or outgo

Question 2

Past/Historical Data

Answer 2

Historical data is typically used when setting assumptions:
When using past data, it is necessary to consider how to deal with:

• abnormal fluctuations
• changes in the experience with time random fluctuations
• changes in the way in which the data was recorded
• potential errors in the data
• changes in the mix of homogeneous groups within the past data
• changes in the mix of homogenous groups to which the assumptions apply

Question 3

Data Fluctuations & Changes over Time

Answer 3

Economic Data Fluctuations
- Economic data fluctuates with changes in economic and fiscal policy as well as with the general economic cycle. Past data for investment returns, salary levels and dividend yields in most countries fluctuates significantly
over an extended time-frame.

Price inflation
- Past levels of an index to measure price inflation usually fluctuate significantly and are often a useful indicator of the economic conditions that existed. They are therefore unlikely to be very useful in determining
an assumption for future levels of inflation.
Consequently, current index values may be a better guide to future levels of inflation