35 Monitoring experience Flashcards
Reasons for monitoring experience
- develop earned asset shares
- update assumptions as to future experience
- monitor any adverse trends in experience so as to take corrective actions
- provide management information
Data required
Data grouping
- reasonable volume of stable, consistent data required, from which future experience and trends can be deduced
- Consistent data: similar form, preferably extracted from the same source, grouped according to the same criteria and equal in terms of reliability
- data need to be divided into sufficiently homogeneous risk groups, according to the relevant risk factors
- ideal has to be balanced against the danger of creating data cells that have too little data in them to be credible
- the period over which the data will be collected: long enough to have sufficient volumes, but short enough so that it represents recent experience
Data required
Big data
- Life insurance companies are able to take advantage of technical developments in the analysis of large volumes of data (“big data”)
- For example, bancassurers hold a large quantity of information about a life insurance customer who also has a bank account with them, including data on that customer’s spending habits.
- but the use of personal data may be restricted by legislation protecting personal information
- ability to analyse and use such information to understand better the underlying risks will become increasingly important in insurance, as more sophisticated analytical techniques develop to facilitate this
- Risk classifications are likely to develop as a result, allowing more accurate rating for each individual customer
- The insurer also then has greater ability to select the preferred risks (targeting those practising healthy lifestyle or those expected to have low lapse rates - having the same account for years)
- may also allow the insurer to drive better experience, through early identification of changes in individual insured risks or potentially through being able to intervene and influence customer behaviours
Analysis of experience
Mortality experience
Subdividing the data
type of contract
age
sex
duration from entry
smoker / non-smoker status
medical / non-medical status
source of business
Time interval: max 5 years
Further classifications (eg by location, even down to postcode level) could be used if there is sufficient data.
The process
Compare expected vs actual
Analysis of experience
Persistency (withdrawal experience)
Subdividing the data
Type of contract: healthy policyholders may be more likely to lapse TA than EA
Duration in force: generally lower near the start of a contract
Sales method and target market: degree of care taken in ensuring that a suitable product is sold
Frequency and size of premiums: monthly premiums there are more opportunities to stop paying premiums (OR: monthly premiums may be considered more affordable than large annual)
*Premium payment method: *premiums paid in cash are more noticeable than premiums paid directly from a bank account and so lead to higher withdrawal rates
Original term of contracts
Sex and age: experience tends to be worse for younger ages
Future withdrawal rates are affected by:
- economic situation, and
- competitive situation of the product eg introduction of more attractive products can have an adverse effect
- perceived value of the product to the customer
The process
For each homogeneous group:
Persistency rate = The number of contracts issued in the last FY / number that survive in-force until the first policy anniversary
Withdrawal rate = 1 - persistency rate
Deaths and maturities should be excluded from the calculation (if material).
Analysis of policies that are made paid-up is normally done as a subsidiary part of the withdrawal analysis.
Two methods:
1. calculated over a defined period: the number surviving the year / by the number in force at the beginning of the year
2. calculated cumulatively: the number surviving the year / by the number in force at the outset ofthe contract.
Analysis of experience
Expense experience
Subdividing the data
Subdividing the data
each policy’s share of the expenses to be subdivided as follows:
1. expenses relating to new business: initial expenses
2. expenses relating to existing business: renewal expenenses
3. expenses relating to terminations (ie deaths, maturities, surrenders, lapses – and possibly for each of these separately): termation expenses
4. expenses relating to investment management: investment expenses
Each of these, should be further subdivided into:
- proportionate to the premium payable under the policy
- proportionate to the benefit level
- fixed amounts per policy
Time interval = 1 year
Another improtant subdivision:
- direct expenses – the expenses that can be attributed directly to a particular product or policy
- overheads – the balance of the expenses, ie those that relate to general management and service departments which are not directly involved in new business or policy maintenance activities.
Commission (if applicable) is normally excluded from the expenses on the basis that its format is known and can be added in later by a formula approach
Having been separated by type, the expenses will need to be split further down and analysed into the required “cells”.
For example, the cells may be based on each:
● accounting fund, or
● each main product line of the company
The cells chosen should not be so small that the analysis becomes unreliable.
marketing
Analysis of experience
Expense experience
the process
the main items of expense are:
salaries and salary-related expenses
Split:
(i) staff whose work comes entirely within a single cell of the analysis (direct expenses)
(ii) staff whose work comes within more than one cell, and (direct expenses)
(iii) other staff. (direct and overheads)
(i) directly allocated to the appropriate cell (e.g.initial expenses of product X which are proportionate to the sum assured)
(ii) staff timesheets can be used to split their salaries etc between the appropriate cells
(iii) direct part can be split further in proportion to the overall split of the group (i) and (ii) staff
Splitting overheads:
- in proportion to the direct expenses already identified
- splitting them in proportion to expense charges from the policies (as it should be easy to calculate total initial expense charges, renewal charges, etc)
- splitting them down in proportion to something else!
property costs
If the company owns, as an asset of its long-term fund, any of the buildings it occupies, a notional rent needs to be charged to the relevant departments
Rent+ property taxes + heating + lighting + cleaning, etc, split:
- by floor space occupied, between departments and
- then allocated in accordance to salaries
computer costs
- The cost of purchasing a new computer could be amortised over its useful lifetime and then added to the ongoing computer costs.
- These can then be allocated according to computer usage.
- Some expenses would not be readily identifiable and would have to be split between the cells pragmatically – perhaps in proportion to the other (known) computer costs, or allocated to departments in proportion to staff numbers and from there to cells.
investment costs
- would be directly allocated to investment expenses and
- hence allowed for in assessing the investment return to use for pricing
- represent them implicitly as a reduction in yield
One-off capital costs
- need to be amortised over the expected useful lifetime of the item purchased
- amortised cost may then simply be treated as part of the overheads
- If the item can be treated as an asset of the long-term fund, the cost would not be amortised. Instead, a charge, eg a notional rent, would usually be made.
Exceptional expense items
- may be ignored in the analysis,
- but their future incidence may be allowed for in margins in the future expense assumptions or risk discount rate.
Analysis of Experience
Investment experience
The experience is likely to be analysed by main asset types and may be done both gross and net of investment expenses
Basis would depend on purpose:
1. Surplus distribution: partially written-up book values
2. comparing unit funds: market values
Assessing the impact of Experience
The analysis of surplus/profit
A company will want to analyse the surplus arising over a year, for example on its supervisory basis in order to:
1. show the financial effect of divergences between the valuation assumptions and the actual experience, exposing which assumptions are the more financially significant
2. show the financial effect of writing new business
3. provide a check on the valuation data and process, if carried out independently
4. identify non-recurring components of surplus, thus enabling appropriate decisions to be made about the distribution of surplus to with-profits policyholders
5. give management information on trends in the experience of the company
6. comply with regulatory requirements.
The analysis of surplus/profit
Valuation surplus arising
An analysis of surplus is a breakdown of the surplus arising over a year into elements such as “surplus arising attributable to investment return experience exceeding valuation expectation”.
The analysis of surplus/profit: Reasons
The financial effect of A v E, and of writing new business
For the elements interest, mortality, expenses and withdrawals, the analysis of surplus tells us:
- if actual experience has been better or worse than expected,
- and what the financial impact is of that variation
As experience differs from the assumptions in the valuation basis, a surplus or loss will arise
mortality surplus / loss will be:
expected death strain – actual death strain
expected death strain = expected mortality × (sum assured – reserves)
actual death strain = actual mortality × (sum assured – reserves)
New business
The analysis of surplus/profit: Reasons
Valuation check
- If we derive the analysis of surplus components from scratch
- (rather than working backwards from the valuation result)
- and they total to give the surplus arising
- then we have performed a valuable check on the valuation process
The analysis of surplus/profit: Reasons
Assistance with bonus distribution
- the analysis can aid bonus distribution where the actuary has flexibility to declare bonuses
- if an item of surplus was non-recurring the actuary would not want to declare it as a regular bonus
- contribution system: non-recurring item may or may not be included in the company’s distributable surplus for that year
The analysis of surplus/profit: Reasons
Information on trends
- ## the valuation surplus investigations will normally be most useful when looking at several years’ investigations together
The analysis of surplus/profit: Reasons
Analysis of embedded value profit
A company may analyse the change over a year in its embedded value (the sum of net assets and the present value of the expected future profit from existing business)
This will allow the company to:
(1) validate the calculations, assumptions and data used
- common to use the same assumptions for embedded value work as for pricing
- crucial that the assumptions used in product pricing be valid
- their continuing validity can be monitored by the analysis of embedded value movement
(2) reconcile the values for successive years
(3) provide management information
- the value of new business written
- the amount of any expense profit or loss;
- the amount of any mortality profit or loss;
- the amount of any withdrawal profit or loss;
- the impact of free assets on embedded value growth (ie is spare capital being used efficiently, or is it just sitting around earning market yields and hence reducing the overall return achieved by the company?); and,
- the impact of supervisory minimum solvency margin requirements on the rate of return achieved
(4) provide data for use in executive remuneration schemes
(5) provide detailed information for publication in the company’s accounts or those of any parent company, in particular the value of new business taken on by the company
