Models

Question 1

Outline how models are used for product pricing

Answer 1

• Choose model points to represent expected new business, eg base on profile of existing business for this or simliar product, modified for expected future changes
• For each model point, projected cashflows, allowing for reserving and solvency capital requirements, on basis of set of assumptions
• Discount cashflows at risk discount rate that allows for
  
  • Return required by the company
  • Level of statistical risk attaching to cashflows (so in theory separate RDR for each component of cashflows)
• Premiums or charges for model point can then be set to produce profit required by company.

Question 3

7 uses of capital for a life company

Answer 3

1. Enables withstanding of adverse, often unexpected, conditions
2. Enable writing of new business (covers product development costs and new business strain)
3. Enables adoption of less restrictive investment policy
4. Smoothing surplys distributions to policyholders
5. Smoothing dividend payments to shareholders
6. Reducing need for reinsurance
7. Allows seizing of profitable business opportunities

Question 4

State 2 types of variation that should be considered when performing sensitiviy testing of the ouput from a model

Answer 4

Model outcome should be abalysed for variations in

1. Model points
2. Parameters