31. Monitoring and feedback into the control cycle Flashcards
Corrective actions that can be taken if product in new market found to be unprofitable
For appropriate corrective action to be taken, the insurer needs to understand the reasons for any adverse trends in experience.
- Update assumptions for future experience – e.g. understand if trends are changing and update assumptions so that they are appropriate for expected future experience
- Re-pricing of products – e.g. include larger margins
- Re-design of products – e.g. through introducing benefit limits or through stricter referral patterns or protocols in order to access benefits; change policy wording
- Change the investment strategy – e.g. an investment strategy that maximises investment returns for the acceptable level of risk
- Change the sales strategy – e.g. which products are marketed through which distribution channel, change the commission structures etc., target populations with the best claims experience/the most profitable group
- Change the reinsurance strategy – e.g. take out reinsurance to protect against future adverse experience
- Change the underwriting strategy – e.g. apply stricter underwriting in order to better price poor risks or to exclude members that do not meet the application criteria
- Change the profit distribution strategy – e.g. to shareholders
- Re-organise the workforce and IT systems to make more efficient use of expensive resources (provide adequate staffing - numbers and competence)
- Change managed care arrangements – e.g. negotiated fees, introduce risk-sharing agreements
Management of risk depends on adequate knowledge of the business in-force and its deviation from expectation in the pricing and subsequent reserving calculations
Two strands of experience monitoring:
1. Actual vs Expected (AvE)
- new business, renewals, mortality, morbidity, withdrawal rates, mortality rates, expenses, investment return investigations
- Analysis of Surplus (AoS)
- investigate financial impact of any difference between actual and expected
Reasons for monitoring experience
- update assumptions for future experience
- monitor adverse trends in experience
- monitor actual to expected experience and take corrective action as needed
- provide management information to aid business decisions
- make better informed decisions about pricing and adequacy of reserves
Investigations analysing decreasing solvency cover
- analyse experience wrt items that could drive observed trend
- likely conflation of multiple items driving experience
- collect data: internal data for claims, membership, expenses, investments; external data for general market trend, economic data
- ensure claims data fully run off or allow for IBNR, OCR where appropriate
- data grouped to identify the risk cells that may be driving observed trend
- investigate any significant changes to bases over the period which may be contributing to the observed trend
- for example, changes to regulation, prices, reserving requirement etc. may have had an influence
- membership and claims data analysed on a per beneficiary per month basis
- one-off events that could have contributed and noted, for example, merger and acqusition, large unusual trends eating into reserves should b accounted for
Consider the follow investigations
- claims, per category, hospital - medication - may be particular category of claims significantly higher than expected
- could indicate loopholes in policy wording or area open to abuse/ anti-selection
- claim experience by provider type/ particular provider may show potential fraud/ abuse
- demographic profile investigated - has average age increased? incidence for chronic disease, consider the gender split
- profile of those terminating membership considered - discern if there is a selective lapsing effect
- business volumes and mix, persistency
- may highlight selective behaviour, especially if older, sicker individuals are joining and younger healthier lives are lapsing
- may be an effect per distribution channel, hence consider volume and mix and lapse per channel
- expenses
- actual vs loadings over time
- perform detailed expense analysis and determine whether loadings appropriate
- where mix of business has significantly changed over time, may have large impact
- investment returns
- actual investment return versus expected
- general level of chronicity and new diseases and industry level of medical inflation may indicate where our bases are out of line with reality
- consider position in underwriting cycle
- specific management decisions that may have impact solvency position
- understanding the factors driving the trend can assist in taking corrective action and prevent the trend from further eroding solvency reserves
Reasons for monitoring new business volumes against targets
- check new business strain (against capital set aside for this purpose)
- check business mix against those assumed in pricing basis
- check adequacy of staff levels
- check commissions paid against those assumed
Renewals (lapses)
- impact of lapses more crucial to profitability, where pricing bases amortised initial costs over number of years of renewals
Adjustments to claims data (before used)
- allowance for problems of heterogeneity
- allowance for unsettled, unreported, and re-opened claims
- large or exceptional claims
- changes in types of claims
- changes in claims development patterns
- seasonality pattern of claims (e.g. higher PMI claims in winter months)
Reasons claim escalations may be different from expected
- medical innovations as result of more expensive than expected equipment
- new diseases/ change in prevalence of certain diseases
- covered lives risk profile may have changed (e.g. due to selective lapses)
- change in behaviour of medical professionals/ demand by policyholders may result in more expensive healthcare providers being used
- implementation of claims management techniques, such as fixed payment methods, may reduce claim amounts
Each policy’s share of expenses are to be subdivided as follows
- new business expenses
- existing (in-force) business expenses
- termination expenses
- claim expenses
- investment management expenses
For the first three categories we determine whether the expenses are:
- proportionate to premium
- proportionate to benefit
- fixed per policy (number of contracts written/ in-force)
Subdividing the data
Expenses of insurer can be subdivided into
- direct: depend on volume of new business/ level of in-force business
- overheads - insensitive to volume of NB/ level of IF business, related to general management - nearly all overheads can be considered per policy, modelled as global assumption independently of number of policies in-force
Commissions are known (formula) and loaded for explicitly in the pricing basis.
For purposes of expense analysis we only consider non-commission expenses:
- initial expenses
- renewal expenses
- termination expenses
- claim expenses
- investment expenses
Reasons for performing an analysis of surplus
(Surplus = asset value - liability value)
- show financial effect of writing new business
- provide check on valuation data, process - if carried out independently
- identify non-recurring components of the surplus, thus enabling appropriate decisions to be made about surplus distribution
- comply with regulatory requirements
Surplus/ loss may arise due to difference between actual experience and valuation assumptions for
- mortality, morbidity
- expenses
- withdrawal rates
- impact of new business
Reasons for analysing change in EV
- validate calculations, assumptions, data used
- reconcile values for successive years
- provide management information
- provide data for use in executive remuneration schemes
- provide detailed information for publication in company accounts, in particular the VNB taken on by the company
