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QBS 5 : PP forecast and actuarial methods (A : PP forecast (DETERMINISTIC…
QBS 5 : PP forecast and actuarial methods
A : PP forecast
OPEN GROUP FORECASTS
New entrant Assumptions:
1) Sex
2) Age at entry
3) Past service if applicable
4) Starting salary
PROJECTION STUDY STEPS
1) Discuss scope of project
2) Determine assumptions for population projection
3) Collect data
4) Produce liability stream for deterministic part of projection
5) Combine results with projected asset returns to produce valuation results
6) Present deterministic results to client (and stochastic if needed)
DETERMINISTIC FORECASTS
USED TO ANALYZE:
1) Deviation from expected experience
2) Impact of diff funding methods/assumptions and contr policies
3) Impact of diff plan designs
4) Analyze trends in ER contr, expense and benefit security
LIMITATIONS
1) Assumptions never fully realized
2) Difficult sensitivity analysis
3) Sponsors view results as set in stone
CHECK FOLLOWING AFTER RESULTS
1) Verify initial year's results
2) Liability and NC increase should be smooth
3) Compare results from alternative scenarios for reasonableness
DIFFERENT METHODS
1) Full valuation at each future valuation date (sophisticated but time consuming and expensive))
2) Full valuations at selected dates (reduces # of calcs)
3) Data grouping (used to reduce # calcs, celling or grouping technique)
4) Spreadsheet method (varies in sophistication)
5) Simplified spreadsheet method (quick projection but less reliable)
DESIRED CELLING TECHNIQUES
1) Cell people near limits
2) Group people (above and below integration limits)
3) Break on each year of service in select period
4) Break on each year of age if eligible for ret
5) DISADVANTAGES: Individuals char lost and skew results
VALUATION VS PROJECTION ASSUMPTIONS
Projection used with expected ret rates vs single rate (timing of benefit pmts affects assets)
Use Select and ultimate for projection (if used for val)
May change assumed inv return for projection
PRESENTATION OF RESULTS
1) Restatement of goals
2) Assumptions used
3) Scenarios investigated
4) Graphs/tables
5) Conclusion and recommendation (areas of further investigation)
STOCHASTIC FORECASTS
ADVANTAGES STOCHASTIC VS DETERMINISTIC
1) Results given in conf. intervals vs single answers (assigns risk)
2) True sensitivity can be performed
3) Reflects diff in risk tolerance between sponsors
4) Facilitates communication between inv managers
5) Shows rltsp between inv performance, contr, expense and beenfit security
CHECK THE FOLLOWING
1) Check detailed trace of results for first few trials
2) Check confidence intervals (tail results)
B : Actuarial methods
CIA focuses on : choice model, model risk and reporting of model.
Review validation method: data, assumptions, methods and results.
When choosing a model:
1) review specification
2) Validate implementation
3) Aware of limitations
4) Document (model choice and process)
VALIDATION METHODS
1) Test cases
2) Reasonableness of results
3) Sensitivity testing
, a) Test output / vary assumptions
, b) Test relationships (Inputs/outputs and assumptions)
STOCHASTIC MODEL VALIDATION
1) Review distribution of inputs, assumptions and outputs.
2) Review distribution of trends, mean/median, symmetry/skewness and tails.
3) Review Input/assumptions correlation
4) review samples
MODEL RISK
1) Risk-rate model based on severity and likelihood of failure.
2) Review risk-rating periodically, if model fails/changes.
3) Risk-rating affects levels of scrutiny
REPORTING USE OF MODEL
1) Affected by nature of assignment (detailed or brief)
2) Modeling particular situations requires reporting.
Forecast types
Projection techniques
Forecast best practices