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Flashcards in 20 - Setting Assumptions Deck (32)
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1
Q

Which characteristics of cashflows do demographic assumptions normally affect?

A

Through timing and the number of cashflows.

2
Q

Which characteristics of cashflows do economic assumptions normally affect?

A

Through the amount / size of cashflows

3
Q

List the demographic assumptions needed for a pension scheme?

A
  1. Rates of retirement in good health - early / late
  2. Rates of ill-health retirement
  3. Rates of withdrawal
  4. Rate of new entrants
  5. Rates of mortality for pre and post retirement
  6. Proportion of married members
  7. Average age of spouses
  8. Spouse’s mortality
  9. Salary scale
4
Q

List the economic assumptions needed for a pension scheme.

A
  1. Investment returns
  2. Discount rate for liabilities
  3. Earnings inflation
  4. Price inflation
  5. Pension increases
  6. Expenses
5
Q

Which source of data is generally the main source of information regarding setting assumptions?

A

Historical data

6
Q

List the possible sources of historical data when setting demographic assumptions.

A
  1. National statistics
  2. Industry data
  3. Tables compiled by actuaries
  4. Past information relating to the particular contract being considered.
7
Q

Give the situations where past data may be useful for setting economic assumtpions.

A
  1. Dividend yields when setting expected future investment returns
  2. Past data on salary levels in a particular country, industry or company when setting salary growth
  3. History of inflation indices when setting assumptions about rates linked to inflation.
8
Q

List the conditions that could have changed that would lead to an insurance company past data not reflecting future experiences.

A
  1. Underwriting practices
  2. Distribution channels
  3. Target markets
  4. Product design features
  5. Underlying mortality rates
9
Q

Which to characteristics of past data need to be balanced when setting assumptions.

A

Relevance and Credibility

10
Q

How could an insurance company set mortality assumptions when there is little past data available for a particular contract?

A

Using:

  1. Data from similar contracts
  2. Industry data
  3. Reinsurers’ data
11
Q

What is a major concern when using National statistics?

A

The data reflects the entire population where the insured population usually experiences different trends.

12
Q

How can risk to a provider of financial benefits be allowed for using margins?

A
  1. Adjusting the risk element of the risk discount rate
  2. Using stochastic discount rates
  3. Applying margins to the expected values
13
Q

Give three examples of profit criterion.

A
  1. Net present value
  2. Internal rate of return
  3. Discounted payback period
14
Q

List the key factors that affect the choice of assumptions within actuarial modelling.

A
  1. The use to which the model will be put
  2. The financial significance of the assumption
  3. Consistency between assumptions
  4. Legislative and regulatory requirements
  5. The needs of the client
15
Q

Which characteristics of past data may require that the data is adjusted to better reflect future experience. (7)

A
  1. Abnormal fluctuations (& one-off events)
  2. Changes in experience over time
  3. Random fluctuations
  4. Changes in the way in which the data has been recorded
  5. Potential errors in the data
  6. Changes in the mix of homogeneous groups within the past data (eg blue s white collar)
  7. Changes in the mix of homogeneous groups to which the assumptions apply
16
Q

Give examples of current data.

A
  1. Statements by governments or large banks
  2. Industry forecasts
  3. Views of companies’ directors
  4. Relationship between the current yields on fixed-interest and index-linked bonds
17
Q

Describe the factors that influence the degree of accuracy required in a modelling assumption

A
  1. Purpose of the model
  2. Financial significance of the assumption
  3. Whether the cashflows are once off or regular
  4. Implicit assumptions
18
Q

Give the factors that make up the risk discount rate.

A
  1. Risk-free rate / required return by shareholders

2. Combined with a risk premium

19
Q

List the features that make a contract design risker (6)

A
  1. Lack of historical data
  2. High guarantees
  3. Policyholder options
  4. Overhead costs
  5. Complexity of design
  6. Untested markets
20
Q

What is the purpose of a profit critetion?

A

To act as a measure of relative efficiency of a contract.

21
Q

Describe the issues with specifically using industry data to set assumptions.

A
  1. May not be possible to split the industry data into appropriate groups
  2. Industry stats may be out of date
  3. More difficult to adjust industry data for abnormal fluctuations than internal data
  4. Industry data is more likely to contain data errors
  5. Industry data may not be in sufficient detail for the required purpose
22
Q

Describe how assumptions are set for claim amounts and numbers.

A
  1. Statistical methods used for fit a distribution to past data
  2. Adjust the distributions for changes in:
    - policy cover
    - underwriting
    - target markets
  3. Use industry or reinsurer data if there is a lack of data
23
Q

Describe how assumptions are set for investment return

A
  1. Depends on the types of assets and the mix of assets
  2. Past data may be useful for projections of returns on different assets
  3. Consider the investment environment
  4. Modify past data to remove fluctuations due to past economic events
  5. Net down the return for taxes and expenses
24
Q

Describe how assumptions are set for expenses

A
  1. Recent expense analysis
  2. Insufficient data could require using other methods:
    - expense data for similar contracts
    - industry data
    - reinsurer’s data
  3. Modify the data for changes in experience such as admin or underwriting
25
Q

Describe how assumptions are set for commission

A

Set rates in line with the market for similar types of contracts

26
Q

Describe how assumptions are set for inflation

A
  1. Inflation assumptions are needed from the middle of the investigation period to the middle of the period where claims are expected to be paid.
  2. Use industry inflation indices
  3. Extrapolate indices forward
  4. Reinsurer help or industry experts - legal changes
27
Q

Give the advantages of NPV as a profit criterion.

A

Simpler decision making process

28
Q

Give the disadvantages of using NPV as a profit criterion.

A
  1. Relies on a number of assumptions about efficient markets and correct discount rates
  2. Not simple to present to non-technical people
  3. Needs to be expressed as a ratio to be meaningful
29
Q

Give the advantages of using internal rate of return as a profit criterion.

A
  1. It is a simple measure
  2. Compatible with a shareholder required rate of return
  3. Easily comparable with different types of investments
30
Q

Give the disadvantages of using internal rate of return as a profit criterion.

A
  1. May not be unique
  2. It might not exist
  3. Difficult to relate to other non-rate measures
31
Q

Give the advantages of using discounted payback period as a profit criterion.

A
  1. Useful when there are issues around available capital

2. Easy to explain as a break-even point

32
Q

Give the disadvantages of using the discounted payback period as a profit criterion.

A

It often does not agree with the NPV as a means of determining which of two projects to undergo as it does not take cashflows after the break even point into consideration.