Ch 35: Monitoring experience

Question 1

In what different ways can experience monitoring be done?

(1,5)

(2,3)

Answer 1

1. Directly
   
   • want to directly analyse experience with respect to a specific item of interest, so do an analysis for this
   • in this chapter we cover following direct investigations
     
     • investigation for mortality + other contingencies
     • persistency investigation
     • expense investigation
     • investment return investigation
2. Analysis of surplus
   
   1. investigate financial impact of any difference between actual and expected by performing analysis of surplus
   2. tells us
      
      1. which component is responsible for surplus arisen
      2. where remedial action can be taken

Question 2

List reasons for monitoring experience as part of the control cycle

(6)

Answer 2

1. Update assumptions as to future experience
2. Provide management information to aid business decisions.
3. Monitor trends in experience
4. Monitor actual compared to expected experience and take corrective actions as needed
5. Make more informed decisions about pricing and adequacy of reserves
6. Develop earned asset share

DIVERGENCE

Question 3

List 4 reasons a life company may need assumptions regarding future experience

Answer 3

1. Model office work
   
   • EV work
   • profitability monitoring
   • financial projections
   • asset-liability modelling for setting investment strategy
   • determining reinsurance requirements
2. Pricing
3. Valuations
4. Setting discontinuance terms

Question 4

List ways in which experience analysis may help provide management information and take corrective actions (5)

Answer 4

By helping managment to identify
* profitable
* products
* sales channels
* markets
* efficient sections of business
* successful investment strategies

• Info provided @ suff detail for man to act on. => reliable and credible

Question 5

What are the general steps involved in an experience analysis? (broadly speaking) (4)

Answer 5

• Decide what type of investigation needs to be done
  
  • direct
  • analysis of surplus
• Gather required data
• Conduct analysis
• Use results

Question 6

Data required for monitoring experience

Basic requirements of good data (3)

Splitting data (3)

Period (2)

Level of detail (2)

Answer 6

• Basic requirement is for data to be
  
  • credible => Sufficient volume
  • consistent => Similar form,source,grouping
  • stable => Adequate to deduce trends and future experience
• Data should be split into homogenous groups
  
  • according to relevant risk factors
  • balance between homegeneity and credibility
  • group hetero lives => averaging of experience
• Period over which data is collected is very important
  
  • sufficiently long time period for enough data volume
  • …but too long time period, might not give info about recent experience
• Level of detail depends on
  
  • volume of data available
  • ideally want split at least for different contract classes

Question 7

Data required for monitoring experience

What do we mean by ‘big data’ and how have technical developments changed the insurance landscape in this regard? (2)

Give an example of big data (2)

Answer 7

Big data
* refers to large volumes of data, compiled from diff sources and analyzed quickly
* technical developments => insurers can handle/analyse large volumes of data more easily

Big data example

• banks with insurance subsidiaries selling insurance mostly to own customers (‘bancassurers’) amass large volumes of additional data on the insurance customers eg personal spending habits and travel locations
• Supermarkets loyalty schemes

Question 8

Data required for monitoring experience

List some advantages of big data (3)

Answer 8

Ability to analyze data to better understand risks:
* More accurate rating factors => more detailed risk classification
* eg type of food, level of exercise
* incr Ability to select preferred risks
* => pref rates for lower risks
* eg good healthy, credit,no lapse
* Monitor big data
* => drive better experience
* Early ident of change in risk => intervene / influence PH behaviour

Question 9

Data required for monitoring experience

List some disadvantages of big data (5)

Answer 9

Big data disadvantages

• reputational damage
  
  • privacy concerns
  • data protection failures
• regulation changes
  
  • regulator preventing certain data being used
  • fines for misuse of data
• data issues
  
  • collected data may be inaccurate, incomplete, or irrelevant
• modelling risk: complex models=> choice of wrong model
• expenses: collecting/analysing data vs benefits

Question 10

List the types of experience investigations an actuary might conduct (4)

Answer 10

1. Mortality and other contingencies
2. Persistency
3. Expenses
4. Investment return

Question 11

Analysis of experience: Mortality

List the classifications by which data (both claims and exposed to risk) would be ideally sub-divided for the purpose of analysing the mortality experience

(8)
(2)
(3)

Answer 11

Most useful subdivision of data is by
1. type of contract
2. age
3. sex
4. duration from entry
5. smoker/non-smoker status
6. medical/non-medical status
7. source of business
8. location

Further classifications useful if sufficient data
1. eg location broken down to postal code
2. occupation (at least broad occupational group)

Term is NB for mortality:
1. Medical improvements
2. Std of living
3. New diseases

Question 12

Analysis of experience: Persistency

List classifications by which data (both claims and exposed to risk) would be sub-divided for the purpose of analysing the persistency experience (10)

Which splits are used in practice (3) ?

Answer 12

Subdivision of persistency experience data would usually be by:
1. Type of contract
* EA usually > persistency than TA
2. Duration in force
* usually lower at start of contract
3. Distribution channel & Target market
* more suitable product sold => better persistency
* more suitable product sold => better persistency
5. Frequency & Size of premium
* + Freq => + chance to stop premiums
* Large Premiums => less affordable
7. Premium payment method
* debit order persistency > cash payment persistency
8. Term of contract
9. Age & Gender
* worse persistency for younger ages

The only first 3 are used as they are particularly important

Question 13

Analysis of experience: Persistency

Give 3 other factors, external to life company, that may also influence persistency rates (3)

What impact would they have on the persistency analysis?

Answer 13

External factors influencing persistency

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

Impact on analysis

• these factors wouldn’t be used explicitly in analysis
• but may be used to understand/explain patterns in experience

Question 14

Analysis of experience: Persistency
Process
Outline how withdrawal rates can be determined for each homogenous group of lives analysed (7)

Answer 14

Est rates for each homogenous group
* Divide contracts issued
* into # survive in-force to next policy anniversary => persistency
* Withdrawals
* Exclude deaths and maturities from calc (if material)
* Repeat for subsequent years to obtain # survive and # withdraw
* Calc persistency
* Defined period = #surv year/ tot in-force @ beg year
* Cumulative = #surv year/ tot in-force @ outset of contract
* Examine results
* Same groups => small diff in withdrawal @ diff durations
* Large diff due to small sample size
* Regroup and recalc
* Consolidate data in form relevant to management

Other persistency analysis we may consider
* analysis of paid-up pols may be done as subsidiary part of overall investigation
* may analyse income/partial withdrawal rates, depending on product design

Question 15

Analysis of experience: Expenses

What is meant by a direct expense and an overhead expense? (2)

What is meant by a fixed expense and a variable expense? (2)

Answer 15

Direct vs overheads
* Direct expenses
* can be directly attributed to a class of business

• Indirect expense / overheads
  
  • are the balance of expenses that cannot be attributed to class of business

Fixed vs Variable
* Fixed:
* Do not vary with amt of business written
* Remain constant in ST, vary in LT
* eg Staff costs, buildings

• Variable:
  
  • Vary with amt of business written
  • eg U/w costs, admin expenses

Question 16

Analysis of experience: Expenses

How should we subdivide expense data? (3)

What are the main expense loading catergories (4)

Why might we exclude commission expenses from the expense analysis groupings? (2)

Time interval impact?

Answer 16

For expense analysis we consider following 4 non-commisison expenses splits
* Initial expenses (new business expenses),
* Renewal (maintenance) expenses,
* Termination expenses,
* Investment expenses

Identify if expenses are:
* Prop to prem => Marketing costs
* Prop to benefit => U/w costs
* Fixed amts/policy => Admin cost
* % of funds under management => Investment exp

Exclude commission from expense analysis groupings
* Its format is known and can be added in later by a formula approach
* Load premium for Comm irresp of past data

Time interval of expense data is also NB:
* Long enough interval for data to be credible but not so long that it is irrelvant

Question 17

Analysis of experience: Expenses

Describe the division of expenses into cells

(4 main points, 6 subpoints)

Answer 17

• cells can be seperated by
  
  • accounting fund
  • each main product line of company
• these may be further sub-divided between
  
  • regular premium business
  • single premium business
• choice of cells will vary across companies depending on
  
  • types and volumes of business written
  • requirements of analysis
• cells chosen should not be so small that analysis becomes unreliable

Question 18

List main items of expenses for a life insurer (6)

Answer 18

1. commission (where payable)
2. salaries and salary-related expenses
3. property costs
4. computer costs
5. investment costs
6. once-off capital costs (other than purchase of a new computer)

Question 19

Analysis of experience: Expenses

Explain how to deal with salaries and salary-related expenses in the expense analysis (6)

Answer 19

• Divide into 3 groups
  
  1. Direct
  2. Indirect
  3. other staff entirely overhead eg catering staff
• treat as follows
  
  • Group 1 staff salaries allocated directly to appropriate class
  • Group 2 staff salaries allocated across classes using timesheets as sharing mechanism
  • Group 3 staff salaries split pragmatically between overheards and direct expenses (which can be further split in proportion to overall split of Group 1 and Group 2)

Question 20

Analysis of experience: Expenses

Explain how to treat property costs in the expense analysis (6)

Answer 20

• if insurer owns any buildings it occupies, notional rent is charged to relevant departments
• if company rents any buildings it occupies, actual rent is used
• Assets should be earning rental so there is a cost to company account for
• Include property taxes, electricity costs, cleaning
• Cost split between departments by floor space occupied
• Or allocated in accordance with salaries in each department

Question 21

Analysis of experience: Expenses

Explain how to treat computer costs (3) and

investment costs (4) in the expense analysis

Answer 21

Computer costs
* Amortised over its useful lifetime
* and then added to ongoing computer costs
* These can then be allocated according to computer usage to different classes/functions

Investment costs
* normally expressed as percentage of funds under management
* directly allocated to investment expenses
* hence allowed for in assessing investment return to use for pricing etc
* reduce return achieved

Question 22

Analysis of experience: Expenses

Explain how to treat once-off capital expenses (other than purchase of a new computer) (4)

Answer 22

• Amortised over expected useful lifetime of item purchased
• Included with overhead expenses
• if item can be treated as asset (eg new head office building), cost not amortised
  
  • instead, charge (eg notional rent)
• exceptional items, not likely to recur, excluded completely from analysis

Question 23

Give an overall summary of the expense analysis (11)

Answer 23

1. start with knowing the expenses, such as salary, computer costs etc
2. we know commission, so this can be excluded from analysis
3. then subdivide non-comm costs into required ‘cells’ ie
   
   1. initial, renewal, termination, investment, and
   2. whether related to per policy, premium, sum assured
4. some expenses can be allocated directly to a particular cell
5. staff expenses may need to be subdivided between cells by use of timesheets
6. overhead expenses need to be allocated pragmatically eg in proportion to split in direct expenses
7. property expenses can be allowed for by
   
   1. charging notional rent in proportion to floor space
   2. then allocated to different cells in proportion to department’s salary cost
8. costs of new computer equipment spread over their future expected lifetimes then allocated to departments in proportion to usage
9. investmnt costs would be subdivided by asses class and usually allowed for by reduction in yield for each class
10. once of capital costs would be spread over the expected future lifetime of the item, then just treated as overhead
11. excpetional expenses may be ignored in analysis, but their future incidence may be allowed for in margins in future expense assumptions or risk discount rate

Question 24

Investment experience investigation (4)

Answer 24

• insurer will want to assess return its achieving on its investments
• methods used will depend on purpose eg
  
  • comparing investment performance of different unit funds, use market values
  • to determine surplus to distribute on revalorisation, probably use written up book values
• experience is likely to be analysed by main asset types and may be done both gross and net of investment expenses

Question 25

Analysis of Surplus
List reasons why an insurer would undertake an analysis of surplus arising over a given period (6)

Answer 25

1. show financial effect of divergeance between valuation assumptions and actual experience, indicating which assumptions are more financially significant
2. to show financial impact of writing new business
3. to provide check on valuation data and process, if carried out independantly
4. identify non-recurring components of surplus , thus enabling appropriate decisions to be made about distribution of surplus to with profits PHs/shareholders
5. obtain management information on trends in company’s experience
6. comply with regulatory requirements

DIVERGENCE

Question 26

Analysis of Surplus
List the main contributors to surplus (or loss) that you might expect to see in an analysis of surplus

Answer 26

• difference between actual experience and valuation assumptions for
  
  • mortality (and other contigencies)
  • expenses
  • withdrawal rates
  • investment returns
• and impact of new business
• changes in valuation assumptions would also contribute to surplus (or loss)

A311

Question 27

Give reasons why an insurer may analyse the change over a year in its EV (5)

Answer 27

1. Validating EV calculations, assumptions, data
2. Reconciling values for successive years
   
   3. Scope for errors => aim to ident all sources of movement
   4. eg notes
3. Providing management information
   
   4. Value of NUB/prod
   5. Amt of expense/mort/withdrawal profits
   6. Impact of free assets on EV growth
   7. Impact of MCR on return achieved
4. Providing data for use in executive remuneration schemes
5. Providing detailed information for publication in accounts
   
   6. SH see drivers of profit

Question 28

List uses of the results of a monitoring exercise (18)

Answer 28

1. update pricing basis
2. revise product design
3. change product mix/launching new products
4. revise underwriting process
5. revise reinsurance arrangements
6. implement/improve retention activity
7. change market message, target market/distribution channel
8. revise sales procedures
9. improve policy contract wording
10. improve adequacy of staffing resources
11. improve systems/data recording processes
12. improve actuarial models
13. change investment strategy
14. change with profits surplus distribution approach
15. update reserving basis
16. raise additional capital
17. alter capital allocation methodology
18. improve risk management controls/governance

Question 29

Can you try and ‘fit’ the various uses of results from experience monitoring into the context of the classic product cycle?

The standard product cycle includes the following aspects

Think of the product cycle covered earlier in the course

1. prod design
2. pricing
3. prod admin
4. marketing & sales
5. underwriting
6. claims management
7. experience monitoring
8. valuation

Answer 29

1. Capital uses
   
   • alter capital allocation methodology
   • raise additional capital
2. Prod design
   
   • revise product design
   • launching new products
3. Pricing
   
   • update pricing basis
4. Product administration
   
   • improve systems/data recording processes
   • improve adequacy of staffing resources
5. Marketing & sales
   
   • improve policy contract wording
   • revise sales procedures
   • change market message, target market/sales channel
   • implement/improve retention activity
   • change product mix
6. Underwriting
   
   • revise underwriting process
7. Claims management
   
   • revise reinsurance arrangements
8. Experience monitoring
9. Valuation
   
   • improve actuarial models
   • update reserving basis
10. Other items that fall more into ‘risk control’
    
    • improve risk management controls/governance
    • change investment strategy
    • change with profits surplus distribution approach