Communicate with a non-actuary boss

[question]

I am doing actuarial review for other companies, but I have difficulties in explaining to my boss who is not an actuary about some actuarial assumptions. The things that he challenges me are like :
For a saving product,
1) Why are lapse rates not varied by occupation, age, etc?
2) Why do similar (not the same) products within a company use different assumptions?
3) Why do different products have different assumption structure, e.g. lapse rates for one product are varied by reasons of lapse, whereas the lapse rate for another product is only a flat rate?
4) Why growth rate is a flat rate for the whole portfolio instead of varied by groups?

I told him that actuary usually bases on company experiences and his professional judgements to come up with the assumptions. Most of the time, only the key factors are considered (not all factors). But he is not convinced, and he even said he can't see the value of an actuary in an actuarial valuation as assumptions are so subjective.

Could anyone help me what else I can talk to him?

Thanks!

[E. Blackadder]

sounds like an intelligent boss. what's the problem?

[shadyridr]

then youre not doing your job properly

[Enough Exams Already]

To points 2 and 3: Assumptions are typically a blend of industry experience, company experience and product experience. As a block of business grows in size and age, credible experience has more of an influence over the values at which assumptions are set. So while similar blocks of, say, UL may start with similar assumptions, differing experience on various blocks may make their assumptions diverge.

To points 1 and 3: Lapse rates as assumptions should be varied by factors that have a significant financial effect. If it's determined that lapse rates vary enough by occupation to have a significant effect on the product's financial performance, then by all means, vary the lapse rates by occupation. Otherwise, splitting lapse assumptions by insignificant factors just creates the illusion of correctness while increasing the administrative burden and introducing more opportunity for errors and problems.

To point 4: By portfolio I assume you're talking about asset portfolios, yes? Some breakout and separate modeling of different asset classes may be appropriate. Would breaking out asset classes provide enough better accuracy to justify the cost and hassle of modeling each separate class? If so, then do it. Otherwise, a single flat rate is as good a starting point as any other.

As for the usefulness of actuaries, tell him to set up an account on this board. We'll school him.

[Wigmeister General]

Originally Posted by question

I am doing actuarial review for other companies, but I have difficulties in explaining to my boss who is not an actuary about some actuarial assumptions. The things that he challenges me are like :
For a saving product,
1) Why are lapse rates not varied by occupation, age, etc?
2) Why do similar (not the same) products within a company use different assumptions?
3) Why do different products have different assumption structure, e.g. lapse rates for one product are varied by reasons of lapse, whereas the lapse rate for another product is only a flat rate?
4) Why growth rate is a flat rate for the whole portfolio instead of varied by groups?

I told him that actuary usually bases on company experiences and his professional judgements to come up with the assumptions. Most of the time, only the key factors are considered (not all factors). But he is not convinced, and he even said he can't see the value of an actuary in an actuarial valuation as assumptions are so subjective.

Could anyone help me what else I can talk to him?

Thanks!

Rarely is the CEO an actuary. So, somebody, somewhere is explaining the actuarial assumptions to a non-actuary boss. Get used to it.

[ditkaworshipper]

Your boss has some very good questions, and you definitely didn't answer his question. I'd be happy to have a boss asking about that kind of stuff, actuary or not.

[Arthur Kade]

Originally Posted by question

1) Why are lapse rates not varied by occupation, age, etc?
2) Why do similar (not the same) products within a company use different assumptions?
3) Why do different products have different assumption structure, e.g. lapse rates for one product are varied by reasons of lapse, whereas the lapse rate for another product is only a flat rate?
4) Why growth rate is a flat rate for the whole portfolio instead of varied by groups?

Those all sound like good questions. I'm an actuary, and I don't know the answers. It sounds like the problem might not be your boss.

[laviniu]

I also think these are good questions. Shouldn't this thread move to another area? I'm curious, but shouldn't the material in FAP module 7 cover the selection of initial assumptions? I'm neither an actuary, nor a student, but I'm under the impression that upper level exam material should help... Of course, I may be wrong. I'm making assumptions too...

[Jack]

Justifying assumptions is a reasonable request. He's seems like a smart guy that is not going to tolerate the lame answers you gave him.


“I told him that actuary usually bases on company experiences and his professional judgements to come up with the assumptions.” This is a broad answer, with horrific grammar, to very specific questions.

[GargoyleWaiting]

Are these assumptions you are taking responsibility for, or is he just asking you to explain what someone else has done?

If the former, you should be able to properly explain why you considered the assumptions to be correct.
If the latter, the main point would be that - while many assumptions should vary by these factors - if there isn't enough data, and the results aren't too sensitive to the assumption then it's OK to use an aggregate rate. There's 2 aspects to actuarial judgement:
- knowing what the important factors are
- knowing if it's worth the effort to allow for them all