F102 Summaries P4 Flashcards
examples of investment guarantees include
- guaranteed minimum maturity values for both unit linked and non linked endowment contracts
- guaranteed minimum surrender values for both unit linked and non linked contracts
- the ability to convert a lump sum into an annuity or vice versa on guaranteed terms.
an IC needs to be able to model the investment guarantee in order to quantify the extra liabilities that it will incur when the guarantee exceeds the EAS. Liabilities can be assessed using:
- Option pricing techniques
- stochastic simulation
Option pricing techniques iro guarantee costing
the value of the liabilities will be similar to the cost of a derivative which covers a similar guarantee or option to that which the company is offering
stochastic simulation iro guarantee costing
the extra sums likely to be needed under the guarantee can be modelled stochastically by running a simulation of investment returns thousands of times
mortality options can be valued using cashflow projections. assumptions are required for:
option take up rate
benefit chosen
mortality of those that exercise the option and those that do not
expenses relating to the option
mortality options, description
many life assurance contracts contain options whereby the policyholder can choose to extend the term or increase the level of cover at normal premium rates, without providing further evidence of health.
to the extent that the option might be exercised by someone in poor health the assurance company will bear a cost - the difference between the ordinary premium rate granted under the terms of the option and that which would have been granted had the life been underwritten.
the actuary will want to ensure that the data they use is complete and accurate, simple checks include
- data movements (reconcile data between start and end of the period)
- consistency (check that numbers are sensible) trends and averages
- unusual values, check for outliers and that unusual values do not exist
- analysis of surplus, are there any unexplained items
experience will be monitored in order to
- develop earned asset share
- to update assumptions as to future experience, thereby feeding back into the control cycle
- to monitor any adverse trends in experience so as to take corrective actions
- to provide management information
experience investigations would include
mortality
persistency
expenses
reinsurance brief definition
reinsurance involves a direct writing company ceding business to another life insurance company, the reinsurer. the reinsurer will have no contact with the policyholders
coinsurance - original terms
original premiums and benefits are shared proportionately. reinsurance commission is significant and determines the price of the reinsurance
coinsurance - level risk premium
reinsurer sets a level premium rate. insurer prices the contracts taking the reinsurance premiums into account.
all types
risk premium
reinsurer sets premium rates. risk premiums change from year to year. may or may not be guaranteed for policy duration. reinsurance benefits based on share of full sum assured or sum at risk.
excess of loss - non proportional reinsurance types
catastrophe reinsurance
stop loss reinsurance
catastrophe reinsurance
shares in the total claims above threshold from multiple claims from a single event.
annually renewable
covers non independent risks - group life insurance.
may be multiple lines for group business.
stop loss reinsurance
covers excess of all aggregate claims in a year over a threshold, up to a maximum.
financial reinsurance
finre can help the cedant to relieve part of its new business financing requirements. it can be structured as a loan, receiving either a lump sum or reinsurance commissions with repayments incorporated into the reinsurance premium or paid out of future profits.
facultative and obligatory reinsurance
reinsurance is usually codified by treaty. facultative means freedom of action, obligatory means removal of this freedom.
determining a market consistent valuation
to determine a market consistent value of liabilities, future unknown parameter values and cashflows are set so as to be consistent with market values, where a corresponding market exists. market values are also used for assets, if market prices exist.
investment returns in the determination of market consistent valuation
future investment returns are based on a risk free rate of return, irrespective of the type of asset actually held, and the discount rates are also based on risk free rates.
risk free rates may be based on government bond yields or on swap rates. it may be appropriate to make a deduction to allow for credit risk.
illiquidity premium in market consistent valuations
under certain conditions, it may be possible to take credit for the illiquidity premium available on corporate bonds and thereby discount liabilities at a higher yield than the risk free rate.
why would it be difficult to obtain market consistent assumptions for some elements of the basis? which elements?
it may be difficult to obtain a market consistent assumption for some elements of the basis, e.g. mortality, persistency or expenses, as there may not be a sufficiently deep and liquid market in which to trade or hedge such risks.
it is then likely that a risk margin would be added to the best estimate of the liabilities. this risk margin would reflect the compensation required by the market in return for taking on those uncertain aspects of the liability cashflows.
what can you do where market consistent assumptions are difficult to obtain?
it is then likely that a risk margin would be added to the best estimate of the liabilities. this risk margin would reflect the compensation required by the market in return for taking on those uncertain aspects of the liability cashflows.
this can be done by adding a margin to each assumption or by using the cost of capital approach.
solvency capital requirements by supervisory authorities
insurance supervisory authorities normally require that lic’s establish a certain amount of solvency capital. this is to protect policyholders from a company reserving too little for their liabilities, and from the harmful effects of asset volatility. supervisory reserving needs to be considered in conjunction with the solvency capital requirements and vice versa.
