Cash Flow Pricing (GCA)_Walter de Oude.p - Actuarial Society of India

77 Pages·2004·11.57 MB·English

6th GLOBAL CONFERENCE OF ACTUARIES
18 – 19 February, 2004, New Delhi
By Walter de Oude
(Subject Code 01 – Subject Group : Life Insurance)
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C a shflo w pricing techniques
Cashflow Pricing
Walter de Oude
5th GCA Feb 2004
Objectives
Illustrate the advantages of cash flow methods over
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traditional methods
Give practical exa mples of how cash flow methods can
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be used for pricing
Outline so me useful techniques, based on the cash flow
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approach, which will enable us to better understand the
business that we write
Page 3
The Actuarial Control Cycle
initial
assumptions
pprrooffiitt tteesstt
updating of
model office
assumptions
actual v.
monitoring
expected
Page 4
Traditional Methods (1)
Developed before co m puters were widely available
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Use tables of annuity (ä ) and assurance (A ) factors, and
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x x
co m mutation functions ( C , D , N , M , R , etc)
x x x x x
Page 5
Traditional Methods (2)
Determining premiu ms involved
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solving an equation like:
= + +
Pä SA I mPä
x:n| x:n| x:n|
w here
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– P, S = premium, sum insured
– I , m =initial, maintenance
expenses
Page 6
Proble ms with Traditional
Methods
Assu mptions are inflexible ( eg interest rate cannot be
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varied over time)
Difficult to allow for co mplex benefits ( eg return of
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premiu ms on death)
Can only allow for one decrement
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(eg no allowance for profits and losses on surrenders,
difficult to include rider benefits)
Page 7
C a sh Flow Methods (1)
M a ke use of co m puters for co mplex calculations
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M o re co mplicated models are possible allowing us to
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overco me these disadvantages
M o re intuitive and easier to understand for non-actuaries
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Page 8
C a sh Flow Methods (2)
Can incorporate assu mptions about:
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– surrenders and lapses 4
– riders and additional benefits 4
– valuation basis and method 4
– n ew business 4
– profitability targets 4
– cost of capital
– bonuses and distribution of surplus
– reinsurance
Page 9
C a sh Flow Methods (3)
The basic idea
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– Set up a colu mn for every cash flow relevant to the
policy, and so me colu m ns for intermediate
calculations if required
– For each colu mn, multiply the possible cash flow by
the probability of that cash flow occurring to get an
expected cash flow
– M anipulate the cash flows to arrive at the desired
result
Page 10