35. Monitoring the experience

Question 1

What are the two ways of monitoring experience?

Answer 1

• Experience investigations- aim to estimate historical parameter values of a single statistic
• Analysis of change in historical financial results due to deviations between A and E

Question 2

Why do we monitor the experience?

Answer 2

• Develop earned asset shares
• Update assumptions for future experience
• Monitor adverse trends in experience to take corrective actions
• Provide management information
• Contribute to industry analyses
• Prudential Authority monitoring

Question 3

Give examples of key investigations

Answer 3

• Mortality
• Persistency
• Expenses
• Investment returns

Question 4

Describe how a mortality or persistency investigation would be carried out

Answer 4

• Subdivide data by:
  o Type of contract
  o Age
  o Sex
  o Duration in force
  o Smoker/non-smoker
  o Medical/non-medical
  o Source of business
• Consider time period
• Process:
  o Derive exposed to risk per time period per category
  o Derive deaths per time period
  o Calculate A/E
  o Consider seasonality cycles and exogenous factors
  e

Question 5

What are the factors that data can be divided by for analysing persistency?

Answer 5

• Type of contract
• Duration in force
• Sales method and target market
• Frequency and size of premium
• Premium payment method
• Original term of contract
• Sex and age

Question 6

Explain how persistency investigation would be carried out:

Answer 6

• Subdivide data into homogeneous groups by:
  o Type of contract
  o Duration in force
  o Sales method and target market
  o Frequency and size of premium
  o Premium payment method
  o Original term of contract
  o Sex and age
• Number of contracts issued in last financial year divided by number that stay in-force till first policy anniversary is persistency rate
• Withdrawal rate is 1 - persistency rate
• Deaths and maturities are excluded if material
• Analysis of paid-up policies usually done as a subsidiary
• Analysis of partial withdrawals might be done
• Consider seasonality cycles and exogenous factors

Question 7

Explain how an expense investigation would be carried out:

Answer 7

• Get list of expenses e.g salary, computer costs etc
• Commission can be excluded from analysis as its known.
• Must subdivide other costs into the required cells, i.e. initial, renewal, termination, investments, related to per policy, premium or sum assured
• Some expenses can be directly allocated to a certain cell
• Staff expenses may be subdivided between cells using timesheets
• Overhead expenses must be allocated pragmatically, e.g. in proportion to split in direct expenses
• Property expenses can be allowed for by charging notional rent to each department in proportion to floorspace occupied, …
• …then allocated to different cells in proportion to department’s salary costs
• Costs of new computer equipment can be spread over future expected lifetimes and allocated to departments in proportion to usage
• Investments costs subdivided by asset class and usually allowed for by reduction in yield for each class
• Once-off capital costs would be spread over expected future lifetime of item then treated as overhead
• Exceptional expense items may be ignored in analysis, but future incidence may be allowed for in margins in future expense assumptions or RDR

Question 8

What checks can be done after doing an expense investigation?

Answer 8

• Reconcile results with expenses in published accounts
• Compare results with those of previous expense investigation(s), to look for trends that need action and act as immediate check, taking account for expense inflation.
• Compare with industry statistics to act as check and indicate problem areas.

Question 9

What are the kinds of analysis of change that can be done?

Answer 9

• Surplus, namely surplus aring or change in shareholders fund
• Change in prudential own funds or technical provisions
• Change in SCR
• Change in VNB relative to budget or forecast
• Change in EV
• Change in forecasts

Question 10

What is the purpose of carrying out an analysis of change

Answer 10

• Show financial effect of divergence between valuation assumptions and actual experience, exposing which assumptions are more financially significant
• Show financial effect of writing new business
• Provide check on valuation data and process, if carried out independently
• Identfy non-recurring components of surplus, enabling appropriate decisions to be made about distribution of surplus to with profits ph
• Give management information on trends in experience
• Comply with regulation

Question 11

What are the contributors to surplus that can be expected?

Answer 11

Differences in actual experience and valuation assumptions for:
* Investment return
* Mortality
* Expenses
* Withdrawal rates
* Impact of new business

Question 12

Why would company want to do an analysis of EV?

Answer 12

• Validate calculations, assumptions and 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’s accounts or those of any parent company, in particular the value of new business taken on by company

Question 13

What is the impact on embedded value if experience isn’t in line with assumptions

Answer 13

• If worse than expected:
  o Free assets increase by less then than expected yield
   E.g. due to extra claims to pay or investment income lower than expected or lower capital values
  o PVFP will increase at a rate lower than discount rate
   E.g. due to high number of withdrawals&raquo_space; fewer policies generating profits
• Vice versa

Question 14

List ways in which results from monitoring can be used to make revisions to models, company and asusmptions:

Answer 14

• Update pricing basis
• Revise product design
• Change product mix / launch new product
• Revise underwriting processes
• Revise reinsurance arrangements
• Implement or improve retention activity
• Change marketing message, target market and/or distribution channel
• Revise sales procedures in terms of training and selection of distributors, wording and format of sales literature and mechanics of commission and clawback
• Improve wording of policy contracts
• Improve adequacy of staffing resources (numbers and competence)
• Improve systems and data recording processes
• Improve actuarial models
• Change investment strategy
• Change with-profits surplus distribution approach
• Update reserving basis
• Raising capital
• Change capital allocation methodology
• Improve risk management governance and controls