Ch 35: Monitoring experience

Question 1

Reasons for monitoring experience (4)

Answer 1

• Develop earned asset shares
• Update assumptions on future experience
• Monitor any adverse trends in experience so as to take corrective actions
• Provide management information

Question 2

Data required for experience investigations

Answer 2

• Data should be stable, consistent from which future experience and trends can be deduced
• Data should be dvided into homogenous groups according to the risk factors (balance against non-credible data in cells)
• The priod over which data is collected is important to consider

Question 3

Future withdrawal rates might be affected by:

Answer 3

• Economic situation
• Competitive situation of the product
• Perceived value of the product to the customer

Question 4

Reasons to analyse analysis of suplus arising over a year (6)

Answer 4

• Show financial effect of divergences between valuation assumptions and the actual experience, exposing which assumptoins are the more financially significant
• Show financial effect of writing new business
• Provide a check on the valuation data and process if carried out independently
• Identify non-recurring components of surplus, enables appropriat decisions to be made in relation to distribution of surplus to with-profit policyholders
• Give management info on trends
• Comply with regulatory requirements

Question 5

Analysis of change in embedded value over the year, reasons: (5)

Answer 5

• Validate the calculations, assumptions and data used
• Reconcile values for successive years
• Provide management info
• Provide data for use in executive renumeration schemes
• Provide detailed info for publication in the accounts of company, in particular value of new business taken on.

Question 6

Using the results of monitoring experience investigations

Answer 6

• Update pricing basis
• Revise product design
• Change product mix/launch new product
• Revise underwriting processes
• Revise reinsurance agreements
• Implementing or improving retention activity
• Changing the marketing message, target market or distribution channel
• Revise sales procedures in terms of training, wording of sales literature and mechanics of commission payments and clawbacks
• Improving the wording of policy contracts
• Improving the adequacy of staffing resources
• Improve systems and daa recording processes
• Improving actuarial models
• Changing investment strategy
• Changing the with-profits surplus distribution approach
• Updating the reserving basis
• Raising capital
• Alter capital allocation methodology
• Improving risk management governance and controls

Question 7

Expense investigation CTI PCMER (m: SPC)

Answer 7

• Commission is normaly excluded from the expense investigatio as its format is known and can be added later by a formula approach
• Noncommssion expenses can be split into:
  * Initial expenses, which arise at the start of the policy term
  * Renewal expenses which arise regularly during the policy term
  * Termination expenses, which arise when the policy terminates
  * Investment expenses, which relate to the management of the company’s assets
• Investment expenses are normally expressed as a percentage of funds under management so that they acn be treated as a deduction from the earned investment return
• Other expenes can be further split according to whether the expenses is proportional to:
  
  • The number of contracts written
  • Amount of premium
  • Amount of benefit
• Most cases expenses are proportional to number of contracts except:
  * Underwriting linked to size of benefit
• Expenses can be further split down and analysed in the required cells:
  * Cells may be based on each main product line of the company
• Main items of expenses are:
  * Salaries - staff timesheets could be used to split salaries into appropriate cells
  * Property costs - notional rent (if the building is owend by the company) or actual rent should be charged to the relevant departments through floor space occupied and the further allocated in accordance to salaries. (similar approach can be followed regarding property taxes, heating, lighting etc.)
  * Computer costs - Cost of computer can be amortised over its useful lifetime and then added to ongoing computer costs, then allocated according to computer usage
• Exceptional expense items may be ignored in the analysis but their future incidence may be allowed for in margins in future expense assumptions
• Reconcile the results - compare total expenses in published accounts with teh sum of expenses over all policies.