Setting Assumptions (21 – 22) Flashcards
Basic Methodology
- Past experience
- Consider future expected conditions
- Determine best estimate assumptions
- Credibility & relevance of data
- Adjust for margins / prudence
** Consistence should be guiding principles
Margins for prudence influences (3)
– purpose if model
– degree of risk
– sensitivity of results
Assumptions
Demographic
Economic
Demographic assumptions
- Mortality
• target market
• underwriting controls
– Base
– Trend
- Morbidity
• disability incidence
• duration of income protection - Withdrawals
• economic & commercial factors
Economic assumptions
– investment return
– expense and commission
– expense inflation
– persistency (?)
– margins
> risk discount rate
> stochastic approach
> margins on expected values
** profit criteria
Mortality trend approaches
- Expectations
- Extrapolation
- Explanatory / process based
Investment parameters affected by
- Significance
- Investment guarantees
- Reinvestment risk
- Intended investment mix
- Reserve size
Note
– market consistency
– taxation
– future bonuses
Expense & Commission (6)
- Initial
• acquisition
• medical underwriting
• administration - Renewal
• administration
• commission - Investment
- Withdrawal / paid-up
- Claim / maturity
- Fixed expenses
Risk discount rate: PD features increasing risk (6)
– lack of historical data
– high guarantees
– options
– overhead costs
– design complexity
– untested market
Consistency
– investment return & inflation
– investment return & bonus loading
– investment return & withdrawal rates
– tax
– new business & expenses
– other products
Valuation basis should reflect
- Expected future experience
- Margins to ensure adequate of reserves
- Legislations / regulation
- Need for consistency
Types of bases / liability valuation
- Published accounts
- Supervisory reserves
- Internal management accounts
- Embedded value
Published account legislative restraints
– going concern v breakup basis
– true & fair
– best estimate / include margins
Embedded value sum
- Shareholder-owned net assets (A-L)
+ - PVFP (PV of future shareholder profits from existing business)
– - Cost of required capital
Appraisal value
Embedded value
+
Goodwill
Consistency in setting valuation basis
- Previous basis
- Assets vs liabilities
- Pricing basis
- Supervisory vs internal valuation
Embedded value purpose
- Internal management accounts
- Published accounts
- Remuneration
- Transactions
Consistency in setting embedded value
– previous basis
– assets vs liabilities
– pricing basis
Factors influencing mortality experience
– target market
– distribution channel
– underwriting practices
– selective withdrawals
– mortality changes
Assess statistical risk (4)
- Analytically
- Sensitivity analysis
- Stochastic model
- Comparison with market data
Persistency (5)
- distribution channel
- economic morale
- policy size / cost
- surrender benefit
- fund performance
- premium payment method
- premium frequency
- premium size
Claim incidence CI
– medical advances
– early diagnostics
– simpler operations
Claim incidence LTCI
– Cap on benefit
– indemnity
– economy
– inflation
– capacity of facilities
– medical advances
