11.2 Setting Assumptions

Question 1

What types of historical data are used to determine demographic assumptions?

Answer 1

National (population) statistics
Industry data
Actuarial tables
The company’s own past experience
Statistics from other countries

Question 2

How is historical data used to determine economic assumptions?

Answer 2

• Past data on dividend yields informs future investment returns
• History of an inflation index informs future index-linked dividends
• Past data on salary levels informs future salary growth
• History of an inflation index informs future benefit growth

Question 3

What current data and forecasts are used in assumption setting?

Answer 3

• Yields of fixed interest and index-linked bonds inform expected future inflation
• Policy statements by governments inform economic factors
• Expert judgement informs economic factors, e.g., inflation
• Regulations and scheme sponsor inform future salary increase assumptions

Question 4

What considerations affect the relevance of data used in setting assumptions?

Answer 4

• Social and economic conditions might have changed
• Benefits/product features may have changed
• Credibility of past data

Question 5

What are the considerations when using past data for assumption setting?

Answer 5

• Abnormal fluctuations: Exclude or mitigate through smoothing or moving averages
• Changes in experience over time: Conduct trend analysis and segment data
• Random fluctuations: Use moving averages or regression analysis
• One-off impacts: Identify and exclude or adjust
• Changes in data recording: Check for consistency and normalize data
• Potential errors: Perform data cleansing and validate against benchmarks
• Changes in homogeneous groups: Segment and apply appropriate weight

Question 6

What is the level of prudence required in assumptions to meet client objectives?

Answer 6

Assumptions for strategic decisions or financial projections need accuracy and prudence
Financial significance requires higher prudence
Distinguish between best estimates and assumptions reflecting uncertainty

Question 7

What are the key assumptions of the main financial products?

Answer 7

1. Claim frequency and amount
2. Mortality: Probability of life insured dying
3. Morbidity: Probability of life insured going from healthy to sick state
4. Expenses: Initial acquisition, maintenance, and administrative costs
5. New business volumes: Estimates of future business
6. Lapse/surrender rates: Probability of policyholder lapsing or surrendering
7. Investment returns: Expected return on investments
8. Inflation: Expected rate of expense increase
9. Discount rates: Rate used to discount projected future cashflows
10. Renewal rates