Chapter 21 & 22 - Setting Assumptions

Question 1

Other influences in claim distribution for CI products: (3)

Answer 1

1. Advancements in medical care
2. Earlier diagnosis
3. Simpler and more readily available operations

Question 2

Modelling and setting assumptions for CI are complicated by: (2)

Answer 2

1. Use of disease-based and treatment based definitions of claims, which may need to be modelled separately
2. Guaranteed and reviewable alternatives

Question 3

The value assigned to the investment return parameter will be affected by: (3)

Answer 3

1. The significance of the assumption for the profitability of the contract, which will depend on the level of reserves built up and the investment guarantees given
2. The extent of investment guarantee given under the contract - will affect the types of assets in which the premium from the contract will be invested
3. The extent of the reinvestment risk and the extent to which this can be reduced by a suitable choice of assets - the less important the reinvestment risk the less account needs to be taken of future investment yields

Question 4

Following needs to be considered when setting the value of the inflation parameter: (4)

Answer 4

1. Current rates of inflation, both for prices and earnings
2. Expected future rates of inflation
3. Differential between the return on government fixed-interest securities and on government index-linked securities, where such exist
4. Recent actual experience of life insurance company or industry

Question 5

When using a CF model, the risk from adverse future experience may be allowed for through: (3)

Answer 5

1. Risk element of the risk discount rate
2. Using a stochastic approach
3. Assessing what margins to apply to the expected values

Question 6

Features that make a product design riskier viewed as an investment option: (6)

Answer 6

1. Lack of historic data
2. High guarantee
3. Policyholder options
4. Overhead costs
5. Complexity of design
6. Untested market

Question 7

Level of statistical risk can be assessed using one of the following methods:

Answer 7

1. Analytically, by considering the variances of the individual parameter values used
2. Sensitivity analyses with deterministically assessed variations in parameter values
3. By using stochastic models for some, or all, of the parameter values and simulation
4. By comparison with any available market data

Question 8

How can embedde value be calculated?

Answer 8

It is the sum of:

1. Shareholder-owned share of net assets (net assets defined as excess of assets held over those required to meet liabilities)
2. The PV of future shareholder profits arising on existing business

Question 9

How is shareholder profits calculated for conventional without profits contracts?

Answer 9

PV of future premiums
Plus investment income
Less claim and expenses
Plus release of supervisory reserves

Question 10

How is shareholder profits calculated for conventional unit linked contracts?

Answer 10

PV of future charges (incl surrender penalties)

Less expenses and benefits in excess of unit fund

Plus investment income earned on release of any non-unit reserves

Question 11

How is shareholder profits calculated for conventional with profits contracts?

Answer 11

PV of future shareholder transfers

(Release of any margins within supervisory reserves relative to the assumptions used within the EV calculation)

Question 12

Assumptions required by IC: (11)

Answer 12

R isk discount rate
I nvestment returns
M ortality rates

P rofitability requirements
I inflation (of expenses or index linked annuities)
N ew business volumes and mix
T ax rates

C ommission
R eserving basis
E xpenses
W ithdrawals