[discount_rates_problem] [purpose_v_best_estimate]

Two well-known actuaries, to whom I’m grateful for taking the time to comment, have told me that the discount rate to be picked depends very much upon its purpose; I agree. So, for an exercise where prudence is of the essence, if higher capital values are sought, then a lower discount rate is likely to be preferable to a higher discount rate.

However, one cannot determine the level of prudence present unless one first knows the likely best estimate of the return (taking account of the asset portfolios and the contractual payments to be made). If, say, one looked at annual rates of 2% or 5%, then 2% intuitively appears more prudent than 5%. However, if the best estimate were 1%, then 2% would not be prudent at all (5% even less so, of course).

On this website, against the environment of specific assets portfolios and a contract in nominal or real terms, I am only trying to see how the best estimate might be derived as opposed to even hinting at how it might be used. How can we reflect reality? Interpreting the evidence is an essential element.