Models & Policy Data Checks (18 – 19, 32) Flashcards
Prime objectives if modelling exercise
– advice
– checks / monitoring
Requirements of a model (11)
– valid & rigorous
– documented
– reflect risk profile
– significant features
– business & economic environment
– communicable
– understandable
– verifiable
– sensible joint behaviour
– NOT overly complex/time consuming
– refinement & development
Model Point
Data record as input to a model
Represent a policy / group of policies
Contain most NB features
Factors in choosing model points (8)
– 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
Four types of life insurance models (4)
- Single policy profit test model
- New business model
- Existing business model
- Full model office
Basic features of life insurance model (5)
– 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
Calibration of stochastic models
- Risk neutral
– valuation
– options & guarantees - Real world calibration
– reflecting LT expectations
Stochastic VS Deterministic
Stochastic
– Options & guarantees
– distribution of outcomes
– interaction btw variables
– estimate probability
Deterministic
– sensitivity testing
– result similar to stochastic (save time & effort)
– check stochastic
Risk discount rate allows for
– required return
– statistical risk
Profit signature
The sequence of profits over time from inception to termination of contract
Profit criteria
– NPV
– IRR
– DPP
Marketability reconsiderations
– PD
> remove features = lower risk
> add = better competitiveness
– distribution channel
– profit criterion
– proceed?
– assumed expenses
Embedded value
Future profit stream on existing business
+
Net asset attributable to shareholders
& taking consideration of COC
Need for capital
– Withstand adverse experience
– finance new-business strain
– investment freedom
Other:
– smooth profit distribution
– reduce need for reinsurance
– smooth dividend payments
– business opportunities
Sensitivities to
– model points
– parameter values
Simple checks
– data movements
– consistency
– unusual values
– AOS
etc…
Data Reconciliation
Data at previous investigation
+
Business onto books
–
Business off books
=
Data at current investiagtion
Non-unitised business checks
– # contracts
– basic sum assured
– office premium
– with-profits: attaching bonus
Unitised business checks
– # contracts
– # units allocated
– current premium payable
– current benefits available
* switches
* change in benefits
How models can be inaccurate (12)
- incorrect programming of product structure
- some products not modelled
- known imminent changes (to eg fiscal regime) not allowed for policy options ignored incorrect parameter choice
- interaction of inter-dependent variables not correctly dynamic
- new business assumptions wildly optimistic, or do not take account of imminent product changes or launches
- model points based on incorrect data
- misrepresentative (badly selected) model points
- deterministic approach where stochastic approach required
- risk discount rate does not make adequate allowance for cashflow variance
- unit of time within model too big
- period of projection too short
- miscellaneous software bugs
Estate of a life company
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
Measure solvency bases (2)
- Supervisory / regulatory
- Economic (market-consistent)
Persistency / withdrawals influenced by
– economic conditions
– media publicity
– comparison with competitors
– selling practices
- bonus levels
- discontinuance terms
- renewal commission
Modelled deterministic
When to use stochastic
– options and guarantees
– variable interest rates (stable & predictable pdf)
– indicate volatility
– identify high risk scenarios
Adequacy of model: factors
- Purpose
- Realistic
- Required output
- Timing
- Parameters
- Economic and commercial environment
- Business mix and volume
- Statutory reserves
- Interactions
- Variability of result
Capital needs (6)
– withstand adverse conditions
– write new business
– investment freedom
– smooth profits
– reduce need for RE
– business opportunities
