Chapter 21 - Setting assumptions Flashcards
What key risk does setting assumptions introduce? (1)
Setting assumptions may => parameter risk: want to reduce this
What is the basic methodology for setting assumptions
- Investigate historical experience and make best estimates of the parameters
- Consider what conditions (including commercial and economic environment) will be like in the future period
- Determine best estimates of your assumptions will be, given the expected future conditions
- The extent you woukd rely on experience data and the extent to which for other factors
- Best estimates may need to adjusted in order to include a margin for prudence
Best estimate mortality:
List 2 separate parts of mortality to be considered when setting best estimate mortality assumptions (2)
- Base mortality: initial rate of mortality, the main demographic assumption for pricing/evaluating life insurance contracts
- Mortality trend: how mortality rate changes over time
Best estimate mortality: base mortality derivation
What factors will influence future mortality experience (3)
Rates should reflect expected future experience of lives to be insured by contract being priced, in terms of
- target market: affected by distribution channel
- underwriting controls:
- expected change in experience since last historical investigation, to point assumptions will apply on average (usually 10 - 15 yrs)
Why are base mortality rates adjusted from standard tables
- save resources
- protect against errors eg, innapropriate graduation
- may be insufficient data from own data
Best estimate mortality: base mortality derivation
What data sources can be used to adjust base mortality rates (6)
- own past experience with that product,
- own past experience with similar product(s),
- reinsurance data
- industry data i.e. standard tables
- international data
- national statistics
State 2 circumstances where the estimation of future mortality improvements is particularly important (2)
- for policies with longevity risk e.g. annuities
- when rates are guaranteed rather than review-able
Annuities could be considered as non-reviewable premium
What are the 3 approaches to determining future rates of mortality improvement and explain them
- expectation approach - involves expert opinion and subjective judgement to specify range of future scenarios
- extrapolation approach - projecting mortality trends in mortality into the future which also required some element of subjective judgement
- explanatory approach - projections attempt to model trends in mortality rates from a bio-medical perspective. Only effective to extent that the processes causing death are understood and modelled
Morbidity assumptions
What factors/kind of rates should we consider when setting morbidity assumptions (4)
Key factors/assumptions
(1) Disability incidence rate and duration for IP
(2) Incidence rate for CI
(3) Incidence and amount for LTCI
(4) Impact of benefit size on assumptions
How are rates for disability incedence and duration for IP derived
- Benefits for IP can be modelled using a multi-state movement hierachy
- estimate transition intensities - which includes claim inception, recoveries and death
- these intensities will need to calculated for homogenous groups, eg by duration of claim of type of disability
What factors affect transition intensities for IP
- PH characteristics
- product design features, eg rehab benefits
- economic morale
- government provision of welfare
- tax
Morbidity rates: Incidence rate for CI
What factors influence claim distribution rates for CI (4)
- May be necessary to estimate significant number of distributions (40+) if each condition modelled separately, plus allowance for future trends
Other influences claim distribution (other than trends), include
- advancement in medical science (cures=> more windfalls)
- diagnosing conditions earlier (more claims)
- simple/more readily available operations (more claims)
Morbidity rates: Incidence rate for CI
What kind of factors complicate modelling/setting of assumptions (2)
- may need to separately model claims definitions which are disease-based and/or treatment-based (eg coronary artery bypass, major organ transplant, heart valve replace)
- guaranteed and review-able alternatives
Morbidity rates: Incidence and amount for LTCI
What key assumptions do we need to estimate for LTCI? (2)
Estimate distribution of
* claim frequency
* claim amount (if funding for care)
Morbidity rates: Incidence and amount for LTCI
What are important factors for LTCI contract assumptions? (5)
Medical advancements
- Transition rates: improved health may reduce inception rates and rates for people moving to higher ben-levels
- Mortality rate: improved health=> people needing benefits for longer
- Costs: changing med care may => higher costs e.g. more expensive procedeurs
Economic factors
- inflation: big problem if benefits are indemnity based
- demand (for LTC) vs supply, usually demand is greater, leading to inflation heavier than economic inflation