Assumptions

Assumptions lie at the heart of actuarial work.

2017 - SOA - The Great Assumptions Debate, American Academy of Actuaries - [link]
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  • More importantly for permanent plans, the actuary can utilize a realistic interest rate for future years.
    • How many actuaries would feel comfortable assuming a 9% interest rate over the next 20 years, if the premium rates were guaranteed?
      • However, in many companies, this interest assumption may be quite reasonable for a product where premiums are not guaranteed.
    • Typically, a much lower interest rate is utilized for traditional nonpar products.
      • For example, an actuary may currently use 8% for 5 years, grading to 6% at the end of 20 years.
      • The premium rates developed using a 9% interest rate are going to be considerably lower for all permanent plans of insurance.

--  Richard A. Swift - [Bonk: Aetna-?]

1980 - SOA - Nonparticipating Life Products with Nonguaranteed Premiums (rsa80v6n22), Society of Actuaries - 18p

  • 1978 - SOA - Expense Assumptions, Society of Actuaries - 16p
  • 1985 - SOA - Actuarial Pricing Assumptions in a Volatile Environment, Society of Actuaries - 32p
  • 2013 03 - SOA - Assumption Governance and Setting Assumptions in Illustration Actuary Testing, Small Talk, By Mark Rowley, Society of Actuaries - [link]
  • Insurance companies have been using illustrations for many years to sell life insurance policies, which essentially are complex long-term financial instruments.
  • The illustrations list death benefits and cash values over time making specific interest rate  assumptions.
    • And those assumptions account for much of the confusion.

⇒  1993 1030 - NYT - Insurance; Confusion Over Policies Leads to Talk of Change - [Judy Faucett], by Leonard Sloane - [link] 

  • The group first considered a suggestion from Chris Kite (FIPSCO) for a new type of index that would allow consumers to compare the assumptions in the illustration.
  • Brenda Cude (Cooperative Extension Service) opined that the target audience does not care about assumptions.  (p931)

--   Report of the Cost Indices Subgroup of the Life Disclosure (A) Working Group

1996-3V2, NAIC Proceedings

  • The actuary cannot and should not attempt to estimate or predict the future.
    • This would reduce actuarial work to guessing.
  • What then are actuarial assumptions?

1998 01 - SOA - Actuarial Futures - Actuarial Assumptions and the Future, by W. Harold Phillips [Hal], Senior Life Actuary at the California Department of Insurance, Society of Actuaries - 4p

  • Assumptions (also Actuarial Assumptions)
    • Definition - An actuarial assumption is an estimate of an uncertain variable input into a financial model, normally for the purposes of calculating premiums or benefits.

actuarialtoolkit.soa.org/tool/glossary/assumptions-also-actuarial-assumptions

  • I think you're right, Walter, in a significant respect.
    • The fact is that a minority would be inclined to make those overly aggressive assumptions and produce unsupportable illustrations,...
    • ...but every time one company would take that stand and use assumptions for the illustration that don't make sense, there's another company that competes with them and feels compelled to play in the same ball park and then another company that competes with them.
    • In the absence of regulation on those who would be most aggressive, the problem grows, but your point is well taken.
    • [Bonk: Walter = Walter Miller]

--  Robert E. Wilcox, Utah Insurance Commissioner and Chairman of the Life Disclosure Working Group (NAIC)

1996 - SOA - Current Developments Surrounding Regulations and Standards of Life and Annuity Products, Society of Actuaries - 18p

  • As Steve discussed, you were illustrating 9% or in the heyday 11%.
    • Granted that was just an illustration, and you may or may not have had cautionary language alerting the policyholder that this isn't a guarantee. 
    • This is just where we are today.
    • Maybe the guarantee is something like 4%, but these people who perhaps were missold a policy by an aggressive agent thought that that 11% was going to be there forever.
    • It's now 7%.
    • ⇒  What is it that they lost?

--  Allan Horwich, partner in a law firm located in Chicago

1999 - SOA - The Role of the Actuary in Litigation Support, Society of Actuaries - 16p

  • Risks to Buyer
  • If assumptions change adversely investment performance can affect satisfaction of long-term goals and cash value can be lower than with Traditional products. (p99)

1987 - Book - Life Insurance, by Huebner, Black, Skipper

  • Fixed contracts have assumptions locked in at issue unless a loss is expected, while flexible contracts like universal life and deferred annuities adjust (unlock) based on actual historical results and current expectations of the future.  (p33)

2014 - SOA - Sustained Low Interest Rate Environment: Can It Continue? Why It Matters, Max J. Rudolph, Society of Actuaries - 51p

  • More importantly for permanent plans, the actuary can utilize a realistic interest rate for future years.
    • How many actuaries would feel comfortable assuming a 9% interest rate over the next 20 years, if the premium rates were guaranteed?
    • However, in many companies, this interest assumption may be quite reasonable for a product where premiums are not guaranteed.
    • Typically, a much lower interest rate is utilized for traditional nonpar products.
    • For example, an actuary may currently use 8% for 5 years, grading to 6% at the end of 20 years.
    • The premium rates developed using a 9% interest rate are going to be considerably lower for all permanent plans of insurance.

--  Richard A. Swift

1980 - SOA - Nonparticiparing Life Products with Nonguaranteed Premiums (rsa80v6n22), Society of Actuaries - 18p

  • Commissioner Robert Hunter (Texas) asked if the assumptions being discussed in Section V of the standards paper would be disclosed in the policy.
    • Commissioner Wilcox responded that they did not need to be disclosed in the same manner that they would be disclosed to an actuary, but that some information would be required.

1994-3, NAIC Proceedings

  • Technical resource advisors [Industry Advisory Group] pointed out that vanishing premium illustrations should include an explanation that premiums only vanish if assumptions reflected in the illustration continue unchanged into the future.
    • The advisors did not favor disclosure of the assumptions underlying policy performance because they were so complex.
    • They were concerned about being able to explain, in an understandable way, the multitude of assumptions with a bearing on policy performance.

1993-1, NAIC Proceedings

  • Dynamic policyholder behavior assumptions include lapses, annuitization, partial withdrawals, loans and funding persistency.
    • For all these types of assumptions, it is difficult to obtain experience data.

2003 - SOA - Applied Modeling Concepts, Society of Actuaries - 21p

  • ….provide illustrations based on different assumptions.
  • This would serve to demonstrate to the consumer the effect on future benefits of changes in assumptions.

--  1988 0613 - ACLI - A Statement on Behalf of the American Council of Life Insurance to the NAIC Market Conduct Surveillance (EX3) Task Force, Subgroup on Life Advertising Issues - 3p 

1988-2, NAIC Proceedings 

  • Current assumptions are critical to interest sensitive products such as Universal Life.
    • When interest rates are high, benefit projections (such as cash value) are also high.
    • When interest rates are low, these projections are not as attractive.

dfs.ny.gov/consumers/life_insurance/types_of_policies

  • It is unlikely that the question of the proper assumptions will ever be acceptable to all insurers on a voluntary basis.

--  Robert G. Braund

1969 - SOA - Life Net Cost Comparisons, Society of Actuaries - 34p

  • When the product was launched, SEC ruled that one was allowed to illustrate a variable life product assuming a growth rate of only 8 percent in the underlying funds.
    • The resulting cash values were not much better than the old participating product.
  • When Monarch Life filed their prospectus, they managed to persuade the SEC that 8 percent was out of date and that 12 percent should be used.
    • Everybody used 12 percent, and the resulting variable product values were much better than those under the traditional participating product.

--  Michael R. Tuohy

1985 - SOA - Variable Universal Life Insurance, Society of Actuaries - 22p

  • It is possible that five per cent might be safely assumed, but there were a great many contingencies about this business, and gentlemen differ as to the rate of interest which can be received in the future, and the assumption in the life insurance calculations is that this money is perpetually invested.

-- Hon. William Barnes

1881-1, NAIC Proc (fka National Insurance Convention)