The company may want to understand the reasons for the deterioration and assess potential impacts on future experience, such as the incidence of a new disease.
If the company starts writing business in new markets or adds new benefits to products, it may need to reassess its reinsurance strategy to manage the associated risks.
The company needs to consider competitive pressures, such as whether most companies have a high reversionary bonus.
Shareholders may prefer bonuses to be paid sooner and may benefit from higher distributions if paid through reversionary bonus based on total surplus.
The company should split expenses into cells based on the whole business of the life company, specific accounting funds, and each main product line, further subdividing into regular and single premium business, paid-up policies, etc.
The insurer may be concerned about claims fluctuations arising on a small book of business, especially if it has not written significant volumes of business.
Unit growth rate is linked to the rate of interest and may depend on the current fund.
The guaranteed benefits might exceed asset share.
Property costs can be split by the floor space occupied across all departments, with expenses allocated based on salaries.
It increases the risk of having to pay more than asset share, especially if business is sold in tranches.
Reversionary bonus forms part of the supervisory reserves, while no reserve is held for terminal bonus.
A financial economic modeling approach, such as a discounted cash flow model using market interest rates, could be used to assess liabilities.
Through changes in their premiums or charges, influencing the volume or mix of business achieved.
If the company's solvency position has deteriorated, it may need to protect itself more from adverse claims experience by ceding a larger proportion of business to a reinsurer.
The company should consider the target market's requirements, such as expected guarantees or desirable levels of smoothing.
Reserves should be sufficient to ensure liabilities can be met as they fall due.
Actions such as misselling can lead to failures in systems and controls, impacting new business processing, claims handling, and policy servicing.
There needs to be a cash flow generated from the guarantee biting, which occurs if the model produces a fund value at the 10th anniversary that is lower than the original premium.
The fund value starts at a level greater than the premium and is expected to grow, likely exceeding any fund decreases due to charges.
Terminal bonus can be reduced to match any fall in asset share.
It may lead to insufficient expertise to cope with growth in volumes of certain business.
The decision depends on the purpose of the calculation and the required degree of accuracy.
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They may be included in general renewal expenses and should allow for the impact of surrenders if this increases reserves.
The implications include potential inaccuracies in expense assumptions, the risk of outdated data affecting financial projections, and the possibility of not capturing changes in the business environment or operational efficiencies.
The yield on government fixed interest bonds can be used as a proxy for risk-free yields, although adjustments may be necessary for specific market issues.
The inflation assumption would be set by comparing market yields on index-linked and fixed government bonds, with necessary adjustments.
When the insured event occurs.
It could significantly increase statutory reserves and reduce the company's free assets.
A stochastic model runs many different investment scenarios where future investment returns are governed by a probability distribution function, allowing for the assessment of various outcomes including poor performance.
The 2002 edition of the Formulae and Tables and their own electronic calculator
Changes in solvency or tax regulations and improvements in reinsurance rates can make reinsurance more attractive.
Selling too little business can result in lower income that does not cover expenses, leading to lower profitability and a need to spread expenses over fewer policies.
The method should recognize profit appropriately over the duration of the policy and avoid discontinuities from arbitrary changes in basis.
The appropriate discount rate is the market yield on zero coupon bonds, which should be risk-free for guaranteed amounts.
Because the company invests a significant proportion of assets in equities, which have a volatile return.
By charging for the guarantees or paying less than asset shares at other times.
Exceptional items that are unlikely to recur should be excluded from the analysis.
The average profitability may be reduced and capital requirements may differ, potentially leading to solvency problems.
Projected cashflows must be discounted at an appropriate investment return to value them on a market consistent basis.
Based on recent mortality experience of the life office or industry experience.
Variations in mortality experience can be influenced by underwriting standards, investment performance, expenses, inflation, withdrawals, and new business mix or volume.
Based on recent experience or known charges, particularly the average annual management charge.
It is important to ensure that the cells are not too small, as this could make the analysis unreliable.
Departments linked to a particular product can be allocated to that product line by splitting time based on the processes undertaken, such as policy servicing, policy setup, or claim settlement.
The outputs should be capable of independent verification for reasonability.
The deterministic model projects forward the fund position based on an expected level of investment returns.
The company may look to reinsure a greater proportion to mitigate increasing risks, enhance solvency margins, comply with regulatory requirements, and support growth in new business.
It increases the statutory reserves that the company needs to hold.
They must allow for features of the business that could significantly affect the advice being given.
Professional guidance and legislation.
Future valuation strain.
Prudently based on analysis of recent experience, allowing for inflation.
Changes in local regulations may allow the company to reduce the amount of solvency capital it needs to hold, encouraging it to reinsure more of its business.
Potential purchasers might require a margin to reflect the risk that mortality and expense assumptions prove to be incorrect.
Expenses need to be inflated to account for inflation and any known changes in expense levels, ensuring they accurately reflect future costs.
Ceding part of the profits to the reinsurer may reduce overall profitability, potentially negating the life insurer's aim.
Changes in business mix, technology, and new products over five years may invalidate old analyses, making them less relevant for current decision-making.
Clarifying inflation increases is crucial because inaccurate assumptions can lead to invalid analyses of surplus and profit.
New business can introduce risk through underwriting uncertainties, potential adverse selection, increased operational costs, and the impact of changing market conditions.
Differences in the socio-economic group of customers, problems with underwriting, or differences in the mix by distributor.
Assumptions for mortality, expenses, expense inflation, and investment return are required.
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It may require the company to cede a larger proportion of business to a reinsurer to ensure smooth underwriting results, avoiding large profits or losses.
An increase in business volume may lead the insurer to seek more reinsurance to help finance new business strain and manage risk exposure.
The expense assumption might be determined by reference to expense agreements available in the market, industry statistics, and features specific to the company's own experience.
Future annuity payments are known amounts after allowing for mortality, making them equivalent to the maturity proceeds of a series of zero coupon bonds of matching terms.
Expected expense cashflows might be valued by discounting at the yields available on index-linked government bonds, with adjustments for expected expense inflation.
The life insurance company might have reinsured some of its business to manage risk exposure, stabilize financial results, protect against large claims, and improve capital efficiency.
The cost derived by the deterministic model is inappropriate because it assumes no risk of investment value falling, which is not realistic.
It may lead to lower profitability.
The company is likely to choose a deterministic projection approach.
It may allow reserves to be released.
The company should consider factors such as the investment strategy, expected investment returns, policyholder behavior, the need for liquidity, the impact on future profitability, and the overall financial stability of the company.
The company should set assumptions based on historical data analysis, market trends, expected future performance, policyholder behavior, and any regulatory guidelines that may apply.
Selling too much business can lead to higher capital strain, solvency problems, operational difficulties, reduced service standards, increased surrenders, and bad publicity.
The reinsurer can review the insurer's underwriting procedures to ensure they are up to date and reflect the latest techniques used by other insurers.
Expenses can be split using a timesheet analysis for functions that work on a variety of processes/products.
Financing reinsurance can help mitigate new business strain and may provide legislative and tax advantages if the reinsurer is offshore.
One-off capital costs should be amortised over their expected useful lifetime and treated as part of overheads, spread by department.
After splitting all expenses, total expenses by product line can be determined, and within each product line, expenses can be split into initial, renewal, termination, and investment expenses.
There is a risk that commission paid is not clawed back on surrender of policies due to distributor practices.
Lack of confidence in the data.
The company should follow principles such as ensuring accuracy in data collection, adhering to regulatory requirements, maintaining consistency in assumptions, considering the impact of policyholder behavior, and reflecting the economic environment in the calculations.
There is unlikely to be a highly liquid active market for mortality risk, so the assumption is set by reference to industry statistics, internal experience investigations, and information from reassurers.
To reduce overall retention, limit the impact of any one claim on profits, gain help with risks it has limited experience of, and receive assistance with underwriting substandard lives.
It is based on assets used to back sterling reserves and is not a critical assumption given that sterling reserves are likely to be small.
They increase the guarantees under a policy.
Investment expenses are likely expressed as a percentage of funds under management, treated as a deduction from earned investment return.
A recent expense analysis can be used for pricing assumptions, ensuring future business profitability, or assessing the economic value of the company.
Investment costs are directly allocated to investment expenses and split by product line based on funds under management.
A deterministic model does not account for variability in investment returns and policyholder behavior, which can lead to underestimating the required charge for the guarantee.
They should be appropriate to the business being modeled and consider the special features of the company and the business/economic environment.
The analysis might be carried out by collecting detailed data on current expenses, categorizing expenses into fixed and variable costs, benchmarking against industry standards, and using statistical methods to project future expenses.
Reserves should include suitable valuation of all liabilities, allowing for options available to policyholders, guaranteed benefits, and expenses with inflation allowance.
It must be paid on death or maturity.
Factors include the average number of policies in force over the analysis period for renewal expenses and the average number of claims for termination expenses.
Pure overhead departments can be split pragmatically across other departments, for example, HR could be split in proportion to the number of staff in each direct area.
Computer costs should be allocated to departments based on computer usage.
Sources of risk include mortality risk, investment risk, expense risk, and lapse risk.
The key cashflows include annuity payments and expenses.
Low reversionary bonus and high terminal bonus appears appropriate.
Inflation is used for inflating expenses and switch charges, particularly considering that a large proportion of expenses are likely to be salary-related.
The main costs are salary and salary-related expenses, which should be split by department or function.
The company may have to pay more than asset share, reducing its free assets.
There is a risk that investment values will fall, resulting in the fund at the 10th anniversary being lower than the guarantee level.
An actuarial model should satisfy requirements such as accuracy, reliability, transparency, flexibility, and the ability to handle various scenarios.
It should be rigorous, well documented, and adequately reflect the distribution of the business being modeled.
Expenses should be subdivided into direct expenses, which depend on the volume of new business or level of in-force, and overheads, which relate to general management and service departments not directly involved in new business or policy servicing.
Counterparty failure, such as that of a reinsurer or issuer of corporate bonds, can pose significant risks to the financial stability of a life insurance company.
To protect the solvency of the company against extreme events.
To obtain additional data or support from the reinsurer, especially if its term assurance rates have moved out of line with other providers.
The company would have to pay the shortfall to any policyholder who surrenders.
A stochastic model can incorporate a range of possible outcomes and variability in assumptions, providing a more comprehensive assessment of risk and potential costs.
Assumptions can be determined through historical data analysis, market research, expert judgment, and regulatory guidelines.
The company runs many simulations, and the cost of the guarantee is determined by the average shortfall over all simulations, which may lead to a higher annual management charge.
