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April 2013 Question 7 solution

Discussion in 'SP2' started by dChetty, Apr 8, 2016.

  1. dChetty

    dChetty Member

    The solution in part 3 ,says that the company will use risk factors to determine the model points? How will this be done?
     
    dChetty, Apr 8, 2016
    #1
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Risk factors could be age, gender, smoker status etc.

    We'd have separate model points for male and female etc
     
    Mark Willder, Apr 8, 2016
    #2
  3. Helloall

    Helloall Very Active Member

    Hi Mark, I dont really understand this answer and how you create model points. My understanding of model points is just that they are average approximations of policies that we expect to sell in this question (premium, term, number of kids, age of kids, date of policy taken out, age of adults etc)

    Hence we use say government data. Then we need to consider how our underwriting process might affect the policies that get taken out. And then we build our model points from this.

    But what does this mean from the answer?

    "Could use grouping by age of child, sex of child, by region or by parental
    ages. Need to allow for any rating applied via underwriting, likely volumes of
    sale and even expected birth rates.
    The company may need to investigate how the mortality rates vary by age
    profile. For example it may find that infant mortality rates are higher than for
    older children. Funeral costs might also vary by age.
    "

    Why do we need to consider mortality rates? rates/assumptions arent model points, no?
    Also what does the grouping exactly mean?

    Any help would be greatly appreciated.
     
    Helloall, Jan 14, 2022
    #3
  4. Mark Willder

    Mark Willder ActEd Tutor Staff Member

     
    Mark Willder, Jan 14, 2022
    #4
  5. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi

    A model point is an example policy. We won't have the time to price every possible policyholder. So we will aim to price maybe 40 example policyholders, each will reflect the average characteristics (rating factors) of that group.

    The key assumption here is mortality, so we need to choose rating factors that impact that. Your suggestions to consider term, number of kids, age of kids, age of adults look like possibilities. Premium wouldn't be in the list though, as that is what we are calculating for each model point.

    So we might have a model point for each of 1 child, 2 children, 3 children, 4 children, 5 or more children. For each of these there may be a separate model point for age of mother for each of under 22, 22 to 27, 27 to 32, etc. You can see that we rapidly end up with a lot of model points if we split each rating factor into say 5 groups. So to reduce the number of model points we'll need to keep the groupings quite wide.

    The solution suggests that child age is particularly important, so we don't want our groupings to be too wide here, eg groupings of under 12 and over 12 might be too wide. So instead we go for narrower groupings for this factor (and maybe wider groupings for some of the other factors to compensate). So we might group by child age as under 2, 2 to 6, 6 to 10, 10 to 14, 14 to 18. For each group we'd take the average, so for the 10 to 14 age group we assume the child in the model point is 12.

    I hope the example above helps.

    Best wishes

    Mark
     
    Mark Willder, Jan 14, 2022
    #5
  6. Helloall

    Helloall Very Active Member

    Thanks very helpful example.

    Cheers
    Mark
     
    Helloall, Jan 15, 2022
    #6

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