Chapter 31: Setting assumptions Flashcards

1
Q

5 Key factors affecting the choice of assumptions

A
  • the use to which the model will be put
  • the FINANCIAL SIGNIFICANCE of the assumptions
  • CONSISTENCY between assumptions
  • legislative and REGULATORY requirements
  • CLIENT NEEDS
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2
Q

When having past data, the actuary needs to consider how to deal with:

A
  • abnormal fluctuations
  • random fluctuations
  • potential errors in the data
  • changes in the experience with time
  • changes in the way in which the data was recorded
  • changes in the balance of any homogeneous groups underlying the data
  • heterogeneity within the group to whom the assumptions are to relate
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3
Q

Features that can make a contract design riskier (6)

A
  • lack of historical data
  • high guarantees
  • policyholder options
  • overhead costs
  • complexity of design
  • untested market
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4
Q

Profit criterion

A

Single figure that summarises the relative efficiency of a contract.
E.g. NPV, IRR, discounted payback period

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5
Q

Demographic assumptions

A
eg mortality rates.
They relate to the size and distribution of the population.
They generally affect the:
- timing
- number
of the cashflows
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6
Q

Economic assumptions

A

eg investment returns
Relate to the level of income or outgo.
They generally affect the LEVEL of the cashflows.

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7
Q

4 Examples of where past data may form a useful starting point

A
  • determining an assumption for future investment returns.
  • past data on salary levels in a particular country/industry/company may be useful when making an assumption about future levels of salary growth.
  • History of an inflation index may be useful in determining an assumption for future benefit growth.
  • Historical data can also be helpful when choosing demographic assumptions
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8
Q

Where a cashflow model is being used to price a product, the risk to the provider from adverse future experience could be allowed for by (3)

A
  • adjusting the risk element of the risk discount rate
  • using a stochastic discount rate
  • applying margins to the expected values
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9
Q

3 Common methods of quantifying profitability

A
  • net present value
  • internal rate of return
  • discounted payback period
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10
Q

Demographic factors (assumptions) needed for a pension scheme model

A
  • rates of retirement in good health
  • rates of ill-health retirement
  • rates of withdrawal
  • new entrant rates
  • rate of mortality before and after retirement
  • proportion married
  • average age of spouses
  • spouses’ mortality
  • salary scale (ie promotional increases)
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11
Q

Economic factors (assumptions) needed for a pension scheme model

A
  • investment returns
  • discount rate (for valuing liabilities)
  • earnings inflation
  • price inflation
  • pension increases
  • expenses
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12
Q

Where there is little past data available, mortality assumptions could be set using (3)

A
  • data from a similar contract
  • industry data
  • reinsurers’ data
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13
Q

5 conditions that could have changed that will lead to an insurance company’s past term assurance data not reflecting its likely future experience.

A
  • underwriting practices
  • the distribution channels used
  • the target market
  • product design features
  • underlying mortality rates
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14
Q

4 Sources of historical data

A
  • national statistics, published by government bodies and economists
  • industry data
  • tables compiled by actuaries
  • past information relating to the particular contract being considered
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15
Q

4 Sources of Current Data and forecasts

A
  • Policy statements by GOVERNMENTS OR BANKS may be useful when making assumptions about economic factors.
  • There are many EXPERTS who provide alternative sources of estimates of future economic variables, most notably price inflation.
  • A SCHEME SPONSOR may be able to provide information on planned future salary increases or likely future rates of withdrawal.
  • The relationship between current yields for fixed-interest and index-linked bonds may provide some indication of the market’s view of future levels of the INFLATION INDEX to which bonds are related.
  • In some instances, assumptions may be defined in REGULATIONS AND LEGISLATION
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16
Q

3 Fluctuations and changes over time

A
  • Changes affecting economic data
  • Price inflation
  • Demographic changes
17
Q

Changes affecting economic data

A
  • 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, 
- dividend yields
fluctuate significantly over an extended time-frame.

It is necessary to use earlier data and strip out fluctuations that relate to economic and fiscal conditions that differ from those that exist currently.

18
Q

Using past price inflation

A

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.

Current index values may be a better guide to future inflation.

19
Q

Demographic changes

A
  • Affected by economic changes

- Mortality data is mainly affected by medical advances