Models & Policy Data Checks (18 – 19, 32)

Question 1

Prime objectives if modelling exercise

Answer 1

– advice
– checks / monitoring

Question 2

Requirements of a model (11)

Answer 2

– valid & rigorous
– documented
– reflect risk profile
– significant features
– business & economic environment
– communicable
– understandable
– verifiable
– sensible joint behaviour
– NOT overly complex/time consuming
– refinement & development

Question 3

Model Point

Answer 3

Data record as input to a model

Represent a policy / group of policies

Contain most NB features

Question 4

Factors in choosing model points (8)

Answer 4

– Computer power
– Variability in contracts
– Complexity of in-force
– Age of company
– Stochastic / deterministic
– Importance of investigation
– Time available
– Sensitivity of results to the chosen model points

Question 5

Four types of life insurance models (4)

Answer 5

1. Single policy profit test model
2. New business model
3. Existing business model
4. Full model office

Question 6

Basic features of life insurance model (5)

Answer 6

– Used to model different types of business

– Project all cashflows

– Allow for interactions/correlations btw variables
> dynamic links
> joint sensible behaviour

– Guarantees/options properly allowed for; stochastic model best for this

– Projection frequency/time period

Question 7

Calibration of stochastic models

Answer 7

1. Risk neutral
   – valuation
   – options & guarantees
2. Real world calibration
   – reflecting LT expectations

Question 8

Stochastic VS Deterministic

Answer 8

Stochastic
– Options & guarantees
– distribution of outcomes
– interaction btw variables
– estimate probability

Deterministic
– sensitivity testing
– result similar to stochastic (save time & effort)
– check stochastic

Question 9

Risk discount rate allows for

Answer 9

– required return

– statistical risk

Question 10

Profit signature

Answer 10

The sequence of profits over time from inception to termination of contract

Question 11

Profit criteria

Answer 11

– NPV

– IRR

– DPP

Question 12

Marketability reconsiderations

Answer 12

– PD
> remove features = lower risk
> add = better competitiveness
– distribution channel
– profit criterion
– proceed?
– assumed expenses

Question 13

Embedded value

Answer 13

Future profit stream on existing business

+

Net asset attributable to shareholders

& taking consideration of COC

Question 14

Need for capital

Answer 14

– Withstand adverse experience
– finance new-business strain
– investment freedom

Other:
– smooth profit distribution
– reduce need for reinsurance
– smooth dividend payments
– business opportunities

Question 15

Sensitivities to

Answer 15

– model points

– parameter values

Question 16

Simple checks

Answer 16

– data movements

– consistency

– unusual values

– AOS

etc…

Question 17

Data Reconciliation

Answer 17

Data at previous investigation

+

Business onto books

–

Business off books

=

Data at current investiagtion

Question 18

Non-unitised business checks

Answer 18

– # contracts
– basic sum assured
– office premium
– with-profits: attaching bonus

Question 19

Unitised business checks

Answer 19

– # contracts
– # units allocated
– current premium payable
– current benefits available
* switches
* change in benefits

Question 20

How models can be inaccurate (12)

Answer 20

1. incorrect programming of product structure
2. some products not modelled
3. known imminent changes (to eg fiscal regime) not allowed for policy options ignored incorrect parameter choice
4. interaction of inter-dependent variables not correctly dynamic
5. new business assumptions wildly optimistic, or do not take account of imminent product changes or launches
6. model points based on incorrect data
7. misrepresentative (badly selected) model points
8. deterministic approach where stochastic approach required
9. risk discount rate does not make adequate allowance for cashflow variance
10. unit of time within model too big
11. period of projection too short
12. miscellaneous software bugs

Question 21

Estate of a life company

Answer 21

The excess of the realistic value of its assets over the realistic value of its liabilities

ie assets less liabilities on a realistic basis.

… internal realistic determination of solvency

Considering statutory solvency as well

Question 22

Measure solvency bases (2)

Answer 22

1. Supervisory / regulatory
2. Economic (market-consistent)

Question 23

Persistency / withdrawals influenced by

Answer 23

– economic conditions

– media publicity

– comparison with competitors

– selling practices

• bonus levels
• discontinuance terms
• renewal commission

Modelled deterministic

Question 24

When to use stochastic

Answer 24

– options and guarantees

– variable interest rates (stable & predictable pdf)

– indicate volatility

– identify high risk scenarios

Question 25

Adequacy of model: factors

Answer 25

1. Purpose
2. Realistic
3. Required output
4. Timing
5. Parameters
6. Economic and commercial environment
7. Business mix and volume
8. Statutory reserves
9. Interactions
10. Variability of result

Question 26

Capital needs (6)

Answer 26

– withstand adverse conditions

– write new business

– investment freedom

– smooth profits

– reduce need for RE

– business opportunities