Chapter 19 : Models (2)

Question 1

What are some uses of models?

Answer 1

1. Product pricing
2. Assessing profitability of existing business
3. Return on capital
4. Capital requirements
5. Developing investment strategies
6. Financial projections
7. Supervisory solvency position.

Question 2

How do we use models for pricing?

Answer 2

1. Determining premiums and charging rate that meets profit requirement
2. Profit criteria:
   a. NPV
   b. IRR
   c. DPP

Question 3

What is the process for cashflow pricing?

Answer 3

1. Use single policy model on individual model point (Premium, expense, inv return, withdrawal, supervisory reserves)
2. Have a model point for each different type of contract
3. Gross up with volumes and mix of business
4. Discount at rdr
5. Use profit criteria (NPV, IRR, DPP)
6. Compare to criteria, alter levels of premium until it meets criteria
   (Deterministic model)

Question 4

Once premiums are modeled (profit criteria) what are the other pricing considerations?

Answer 4

1. Marketability
2. Capital for expected sales volumes
3. Whether return on capital is satisfactory

Question 5

Why does an insurer need capital?

Answer 5

1. Withstand adverse, unexpected conditions
2. NB Strain
3. Riskier investment strategy

Question 6

How do we go about projecting solvency?

Answer 6

1. Comparing the value of assets against value of liabilities
2. Modelling should be dynamic
3. Solvency projections allow for management actions.
4. Can be deterministic or stochastic