**Ch 39: Monitoring

Question 1

Give the reasons for monitoring experience (4)

Answer 1

1) This is a fundamental part of the actuarial control cycle.
2) Used to update the method and assumptions to be more relevant to future experience
3) Used to monitor trends in experience, so as to be able to take corrective actions
4) Provide management information

Question 2

Give the data requirements for experience monitoring (6)

Answer 2

1) Reasonable volume
2) Stable and consistent
~ Adequate
~ Relevant
3) Divided into sufficiently homogenous groups
4) There should be enough data in each group to be statistically significant
5) Data on exposure to the risk of a particular product feature or business operation should also be available
6) In a useful form

Question 3

Describe the analysis process for statistical factors

Answer 3

Factors such as mortality or withdrawals should be grouped into age bands with the number of deaths divided by the number of lives exposed to that risk and then these results compared to a standard table or other assumptions.
I.e. Investigate actual vs expected experience.
- Mortality
- Morbidity
- Claims volume and mix
- Expenses
- Lapses
- New business

Items to be analyzed:
- Demographic factors (claims/exposed to risk)
- Economic factors (internal rates and investment returns)
- Operational factors (effectiveness of underwriting process and expenses analysed)

Measures for comparison
- Insurer assumptions
- Industry experience
- Use of standard tables
- Indices

Consider the more significant assumptions more closely

Question 4

Describe the analysis process for economic factors

Answer 4

Interest rates or return assumptions are simply compared to actual experiences

Question 5

Give the factors to keep in mind when setting or adjusting assumptions (7)

Answer 5

1) Significance of a particular assumption on the overall result
2) Relationships/consistency between assumptions
3) The need of the client
4) Legislative or regulatory constraints
5) Margins in assumptions vs the discount rate
6) Time horizons over which assumptions apply
7) The credibility of results and hence the need for margins

Question 6

Give an important consideration around the source of the data with regards to the use of analysis

Answer 6

Whether the period under investigation was typical and whether the experience is likely to be representative of future experience

Question 7

Give the factors that should be allowed for in an analysis (7)

Answer 7

1) Trends
2) Cycles
3) Abnormal events
4) Random fluctuations
5) Data risks
6) Modelling risks
7) Consider whether past experience is good indication of future experience
- Changes in business profile
- Changes in policyholders

Question 8

What are the likely results of experience monitoring? (2)

Answer 8

1) Changes to assumptions or models used - pricing, contributions or provisioning
2) A change in the assessment of the risks faced by a provider or in its risk management strategy

Question 9

Give the method for experience monitoring (3)

Answer 9

1) Division of data into suitable groups that are homogeneous by risk
2) Identification of any past trends, cycles, anomalies and random variations in the past data
3) Using the results to revise models and assumptions used

Question 10

Give considerations when dividing the data into homogeneous groups (3)

Answer 10

1) The volume of data in each group
2) The risk factors for the investigation
3) Changes that have occurred that will reduce the relevance of old data

Question 11

Give considerations when using the results of a monitoring process when revising assumptions and models (3)

Answer 11

1) The purpose and hence the need for accuracy and margins for prudence
2) Allowance for future trends
3) Likely differences in future experience from past experience

Question 12

List the factors that a monitoring investigation into the sickness experience of an insurer could use to split the data (8)

Answer 12

1) Policy type
2) Policy conditions - periods or definitions of sickness
3) Age and gender
4) Duration
5) Smoker status
6) Accepted on normal pr special terms
7) Target market
8) Occupation

Question 13

List the factors that a monitoring investigation into the withdrawal experience of an insurer could split the data into (9)

Answer 13

1) Type of contract
2) Duration in force
3) Source of business
4) Target market
5) Frequency of premiums
6) Size of premiums - relative to income
7) Premium payment method - cash or EFT
8) Age
9) Gender

Question 14

Give possible reasons for an insurance company to experience high lapse and surrender rates (4)

Answer 14

1) Inappropriate selling
2) Product term competitiveness
3) Poor performance - investment or admin
4) Mix of business

Question 15

Give the avenues for action that an insurer can take if it finds an experience to be too far from expected (3)

Answer 15

1) Analysis and investigation
2) Change the business strategy
3) Ensure the products meet customer needs

Question 16

List the main investigations that could be conducted by a financial product provider if there is a reduction in profits (8)

Answer 16

1) Premium investigation
2) Claims investigation
3) Expense investigation
4) Underwriting profit investigation
5) Investment income investigation
6) Legislative changes
7) Solvency requirements
9) External factors

Question 17

Give the concerns to be analysed in a premium investigation (6)

Answer 17

Sales volumes:
1) Actual vs expected volumes
2) If there are more attractive variations of the product released by competitors
3) New market entrants that are taking up market share
4) Comparison of business practices with competitors and any major changes

Premium level:
5) Comparisons to competitors and expected values
6) Investigate any loss leaders that competitors are running that makes premiums seem relatively high

Question 18

Give the concerns to be analysed in a claims investigation (5)

Answer 18

1) Claims analysis to investigate any change in the premium basis
2) General claim trends - large claims, high frequency, catastrophe, random variation
3) Analysis of coverage and policy wording
4) Reinsurance effectiveness
5) Adequacy of reserving - may be unnecessarily prudent

Question 19

Give the concerns to be analysed in a expense investigation (2)

Answer 19

1) Effects of any internal changes - sales channels, commission rates
2) Mix of business - premium contribution rates

Question 20

Give the concerns to be analysed in a underwriting profit investigation (2)

Answer 20

1) Quality of underwriting - procedures and guidelines
2) Underwriting performance on homogenous cohorts

Question 21

Give the concerns to be analysed in an investment income investigation (2)

Answer 21

1) Benchmarks
2) Peer groups

Question 22

Components of uncertainty

Answer 22

• Profile of business/scheme (‘including persistency)
• Risk experience (mortality, withdrawals, etc)
• Investment performance
• Expenses
• Environment (regulation, taxation, professionalism, etc)
• Compare actual to expected
  ~ Assumptions
  ~ Investment benchmarks
  ~ Policy/scheme objectives

Question 23

Measuring investment performance

Answer 23

Consider the investment strategy and asset allocations
- Appropriate for liabilities
- Solvency position and funding fosition
- Expectations of investors
- Regulatory requirements

Identify deviations from the investment policy document

Consider investment performance in light of investment objectives. Benchmark and performance of other funds/fund managers.

Consider CF’s into and out of the fund