QA Bank Part 7 Flashcards
4 Advantages of a deterministic model
- simplicity
- clarity as to which economic scenarios have been tested
- speed of design and running
- ease of communication of results
3 Advantages of a stochastic model
- it tests a wide range of economic scenarios, including scenarios that may not have been thought of under a deterministic model
- it allows better for the random nature of variables and the correlations between them.
- it is more useful for assessing the impact of financial guarantees and options
Steps in developing and applying a deterministic model
- specify the purpose of the investigation
- collect, group and modify data as necessary
- choose the form of the model, identifying its parameters and variables
- ascribe values to the parameters using past experience and appropriate estimation techniques
- construct a model based on the expected cashflows
- check that the goodness of fit is acceptable
- run the model using estimates of the variables in the future
Define “Model Point”
A set of data representing a single policy or a group of policies.
It captures the most important characteristics of the policies that it represents.
Explain why model points may be used
The insurer may have very many policies and it may not be practical to run all the individual policies through the model.
Instead these policies are grouped into those that would give very similar results in order to determine a number of model points.
Important characteristics to be captured in the critical illness model points (8)
- term of the policy
- duration in-force
- sum assured payable on occurrence of a critical illness
- basis of policy (single life, joint life, last survivor)
- age of life
- gender of life
- health status of life
- smoker status of life
Define Model error
Model error means a model is developed that is not appropriate for the task at hand.
How might model error be assessed?
Model error can be assessed by checking the goodness of fit of the model output against actual data.
Define parameter error
Parameter error means incorrectly setting parameter values used when the model is run. Can involve individual parameters and/or correlation between parameters.
How might parameter error be assessed?
Parameter error can be assessed by carrying out sensitivity analysis to consider the effect of varying each of the parameter values.
When such sensitivity testing is carried out, allowance must be made for any correlation between parameters.
11 Main uses actuaries make of data
- Administration
- Accounting
- Statutory returns
- Investment
- Financial control, management information
- Risk Management
- Setting provisions
- Experience statistics
- Experience analyses
- Premium rating, product costing, determining contributions
- Marketing
How might an actuary use the Balance Sheet data when valuing an employee benefit scheme?
The balance sheet can be used to verify the value of the assets at the valuation date.
How might an actuary use the Income and expenditure statement when valuing an employee benefit scheme?
The statement will give cashflow information about contribution and investment income and benefit outgo that can be used to verify other data.
How might an actuary use the asset data when valuing an employee benefit scheme?
A full listing of the assets can be obtained, this can be used to verify whether the assets held:
- actually exist
- are admissible for valuation purposes,
- or whether their inclusion in the valuation is restricted by regulation or legislation.
5 Key considerations in setting assumptions in actuarial work
- consider the use to which the assumptions will be put
- take particular care over the choice of the assumptions that will have the most financial significance
- achieve consistency between the various assumptions
- consider any legislative or regulatory constraints
- consider the needs of the client
List features of a product design that will increase the financing requirement
- lack of historical data
- high guarantees
- overhead costs
- policyholder options
- complexity of design
Advantages of funding a pension scheme in advance from the viewpoint of the employer
- provides security for members, and hence meets paternalistic aims of employer
- may be required by regulation
- tax incentives may be given on contributions and/or investment return making funding in advance attractive
- competitor schemes may be funded in advance and therefore this scheme may need to follow suit to make it attractive to new and existing staff
- if an appropriate funding method is chosen, then liquidity concerns can be eased
- the employer has some degree of flexibility in relation to the timing of contributions
- a single premium at inception might be able to be invested at a known yield to provide appropriately timed cashflows thereby avoiding reinvestment risk and reducing costs.
