setting assumptions

Question 1

how to set the mortality assumptions in general, after collecting the data.

Answer 1

Assumption is required for both the base and trend mortality

1. set the base mortality
   Using own, insured lives, reinsures, or population data
   Make adjustments for differences in the data’s group profile and the actual underlying lives.
2. set the trend mortality (future expected mortality changes over time)
   using the expectation, extrapolation and explanatory approaches
3. Allowances
   - Make allowances for improvements( if permitted) or deterioration.
4. Projections for allowances
   Deterministic projections might allow for different mortality improvement rates
   according to year of birth cohort (as well as by age and gender).
   * Alternatively, stochastic mortality projections can be used, such as the Lee-Carter
   or P-spline method, although these may be challenging to calibrate.
   * The assumptions should consider any applicable actuarial professional guidance

Question 2

How would you set assumptions in general

Answer 2

1. choose a time period
2. collect data ( Use historic data for setting EV basis)
3. Allow for future expected changes
4. May add risk margins

Question 3

outline the 3 ways in which future expected experience can be allowed for in mortality assumptions

Answer 3

Expectation approaches,
- involving expert opinion and subjective judgment to specify a range of future scenarios;

Extrapolation approaches
- based on projecting historical trends in mortality into the future; and

Explanatory approaches
- which attempt to model trends in mortality rates from a bio-medical perspective.

Question 4

Set assumptions/ basis for the investment returns

Answer 4

• This will be based on the expected future returns for each of the asset classes.
• Assumed returns for different asset classes should be consistent with one another.
• The returns for each unit fund are then the weighted average expected return based
  on the particular fund’s asset profile.
  ➢ This would usually be the longer-term mandate or benchmark.
• Separate assumptions for interest income, rental income and capital gains may be
  required depending on the tax regime.

Question 5

items to make assumptions for in the basis

Answer 5

Mortality/ risk covered by the product
investment returns
Risk discount rate
Expense
Commission
Expense inflation
Withdrawals
Tax

Question 6

how to set assumptions for the risk discount rate

Answer 6

This will be based on the risk-free rate (yield on government bonds) of appropriate
duration.

• There will be an allowance for return for shareholders and to reflect the risk of the
  business.
• The Capital Asset Pricing Model (CAPM) is one method that can be used as a guide
  to the appropriate level of the risk premium to be added to the risk-free rate.

Question 7

expense Inflation assumption setting

Answer 7

• This could be based on the company’s expectations for expense growth,
• Alternatively, it could be taken from the difference between the nominal and real
  yield curves.
• The assumptions for expense inflation need to be consistent with the assumptions
  for investment returns.

Question 8

Withdrawal assumption settings

Answer 8

• The recent experience would be a starting point.
• However, this assumption is more sensitive to expected future economic conditions
  including employment rates.

Question 9

Tax assumption setting

Answer 9

• This would be based on the current tax regime and current tax rates.
• Any expected changes to these would normally only be taken into account if the
  changes were certain and imminent.