Modelling

Question 1

Model Design: Operational Issues / Features of a Good Model

Answer 1

CLERICAL ADVISORS

Capable of refinement
Length of time to run and cost low
Easy to understand
Rigorous
Independent validation of output
Clear results
Adequately documented
Large range of implementation methods

All significant factors allowed for
Developable
Valid
Inputs to parameter values appropriate
Sensible join behaviours of variables
Output and workings are comunicable
Reflects risk profile
Simple while retaining key features

+ Suitable frequency of cashflows to ensure accuracy and practicality

Question 2

Considerations in Assessing Different Models

Answer 2

FENCED

Fit for purpose
Expertise available in house
Need flexibility
Cost of each option
Expected number of times used
Desired accuracy

Question 3

Sources of Data

Answer 3

TRAINERS

Tables (e.g. life tables)
Reinsurers
Abroad (data from overseas contracts)
Industry data
National statistics
Experience investigations on the existing product
Regulatory reports and company accounts
Similar Contracts

Question 4

Potential Issues when using data

Answer 4

QUERIED

Quality (credibility)
Up-to-date?
Errors
Relevance (heterogeneity)
Incomplete?
Exceptionals
Detail insufficient

Question 5

Factors to Consider when Setting Assumptions

Answer 5

LUNCH

Legislation /regulation
Use of the data
Needs of the client
Consistency between assumptions
How financially significant is/are the assumptions

Question 6

Considerations when using past data to set future assumptions

Answer 6

BEST ARCHER

Balance of homogeneous groups underlying the data may have changed
Economic Situation may have changed
Social conditions may have changed
Trends over time, e.g. medical or demographic

Abnormal fluctuations
Random fluctuations
Changes in regulation
Heterogeneity within the group to which the assumptions will apply
Errors in data
Recording differences