ST1 CH 16 Assumptions (4) - Other Assumptions

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ST1 CH 16 Assumptions (4) - Other Assumptions by Mind Map: ST1 CH 16 Assumptions (4) - Other Assumptions

1. 1. New Business Volume

1.1. Assists in expense allocation to premium basis amount of reserves that will be needed to support launch

2. 2. New Business Mix

2.1. Mix of business risk

2.1.1. maybe necessary to make average assumptions about a group of policies, therefore cross subsidy - assumption for mix required Cross subsidies opens up anti selection risk - riskier lives than expected pricing basis - if competitor has clearer subdivision - wins lighter risks - monitor experience in risk cells to reappraise assumptions on regular basis.

2.2. Average policy size

2.2.1. Policy size -  factor in expenses maybe linked to socio economic profile of target market Consider consumer demand and levels of inflation

2.3. split by product

2.3.1. Product line estimates so indirect expenses charged accurately Allocation of solvency capital requirements within pricing calculations

2.4. split by distribution channel

2.4.1. Priced uniformly, but sold via no of channels, need projections of volumes via each channel. Monitor as commission rates may differ.

2.5. split by territory

2.5.1. IP Risk can vary drastically between urban and agricultural rating factor - pricing averages. Cross subsidies

2.6. split by gender

2.6.1. Legislation might not allow Unisex rates, estimate of numbers taking up

2.7. split by occupation

2.7.1. Rating factor - material impact on propensity to claim. If not used as factor, need to allow for volumes at each risk level so adequate premium over whole portfolio.

3. 3. Discount rate

3.1. Introduction

3.1.1. SH Invest considering returns offered by companies - can move if they want Higher return, higher risk - Risk premium over returns on safer investments Insurance company - ideal risk free asset plus risk premium - risk discount rate what is appropriate rate? CAPM and other methods RDR: *Required return (context of SH investing) *Level of statistical risk - additional required return resulting from specific projects insurance company investing in

3.2. CAPM

3.2.1. What is appropriate risk premium? CAPM - idea that well diversified portfolio cancels out risks of investing in individual shares and leaves unavoidable risks on investing in stock exchange. Proxy used to risk free - short term deposits, average risk premium that diversified portfolio has yielded over rf over period of time is estimated. May measure as difference in return of well diverisified portfolio and some risk free asset. Compare over period of time then can answer how risky a particular companies shares are relative to well diversified portfolio - Beta. Ei = r + (Em - r)Bi Ei - expected return on asset (company shares) greater than 1 implies when market is rising, the asset value will increase more than the market average.

3.3. Allowing for product specific risk

3.3.1. We get Ei from CAPM say, but each project is as equally as risky. Insurer should view itself as an investor for each product. Long run, profits of company are profits from products. change in mix from safer to innovative contracts may change markets evaluation of company - in reality, competition can make it very difficult to allow properly for high risk business. Innovative design launch, risk premium demand, generate higher return on capital, RDR higher. Product riskier if: *Lack of historical data *High Guars *PH Options *Overhead costs *Complexity of design *Untested markets Can assess statistical risk level by: *Analytically - considering variances of individual parameters used - distributions of parameters - indicate stat risk *Sensitivity analysis - deterministically assess parameter variations - changes in profitability as result of parameter changes *Stochastic model - some or all parameter values and simulation - vary parameter values *Comparison with available market data

3.4. Consolidation of two approaches

3.4.1. Ei, less risky projects lower  than Ei, and higher if more. Important points: *RSR higher than rf, so changes to interest rates should change RDR *Margin over RF and RDR should reflect risk in product for pricing. different products should have different levels *Overall return is generated from entire business activities need to meet Ei *RDR is simply a number used as a criterion in profit testing.

3.5. Market Consistency