Chapter 30 Monitoring & feedback into the control cycle

Question 1

What role does monitoring experience play for a health insurance company? (4)

Answer 1

• forms part of the actuarial control cycle
• management of risk will depend on adequate knowledge of the business in force and its deviation from expectation in the
  
  • pricing, and
  • subsequent reserving calculations

Question 2

List reasons for monitoring experience as part of the control cycle

(7)

Answer 2

1. Update assumptions for future experience
2. Provide management information to aid business decisions.
3. Monitor changed trends in experience and take corrective action
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. For underwriting can: check effectiveness of procedures, identify anti-selection
7. For reinsurance can: assess need for reinsurance, calculate profit share entitled

Question 3

List some reasons a health insurance company may need assumptions regarding future experience (6)

Answer 3

1. Model office work
   
   • EV work
   • profitability monitoring
   • financial projections
   • determining reinsurance requirements
2. Pricing
3. Valuations

Question 4

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

Answer 4

By helping management to identify

• profitable
  
  • products
  • sales channels
  • markets
• effecient sections of business
• successful investment strategies

Question 5

Types of experience monitoring: intro

Briefly describe 2 ways in which experience monitoring can be done for a particular factor of interest (2)

Answer 5

Experience monitoring can be done either:

• directly, or
• ​analysis of surplus (AoS)

Question 6

Types of experience monitoring: additional

Briefly describe 2 ways in which experience monitoring can be done for a particular factor of interest:

• directly (4)
• via analysis of surplus

Answer 6

Experience monitoring can be done either:

Directly

• explicit investigation of the factor(s) of interest
• want to directly analyse morbidity experience, so do an analysis for this explicitly
• for the factor of interest (eg morbidity) results from a direct experience investigation will tell us how much actual morbidity differs from expected morbidity
• may also be called an ‘actual vs expected’ investigation

Analysis of surplus

• can investigate impact of any difference between actual and expected by considering the financial impact thereof, by performing an analysis of surplus
• AvE investigation would tell us “actual <> expected”
• …but analysis of surplus would importantly tell us
  
  • financial impact of difference of AvE ie which component is responsible for surplus arisen
  • where we really need to take remedial action vs where we can be less worried of differences of AvE

Question 7

Types of experience analysis: direct investigations

List the types of experience investigations an actuary might conduct (7)

Answer 7

1. New business
2. Renewal rates
3. Mortality, sickness, and other contingencies
4. Claim amounts
5. Persistency/withdrawal rates
6. Expenses
7. Investment return

Question 8

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

Answer 8

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

Question 9

List the key points to consider regading the data required for monitoring experience (4)

Answer 9

• consider basic requirements the data must fulfill
• being able to split the data into homogenous groups
• consider the period over which data is collected, as this is very important
• consider the level of detail required and what this depends on

Question 10

Discuss the data required for monitoring experience, considering:

• basic requirements of good data (3)
• splitting data (2)
• period (2)
• level of detail (2)

Answer 10

• Basic requirement is for data to be
  
  • of sufficient volume
  • consistent
  • adequate to deduce trends and future experience
• Data should be split into homogenous groups
  
  • according to relevant risk factors
  • balance between homegeneity and credibility
• 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 11

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 (1)

Answer 11

Big data

• big data essentiallly refers to large volumes of data
• 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

Question 12

List some advantages of big data (6)

Answer 12

Big data advantages

• allow better understanding + analysis of risks…
• …hence better predict future behaviour
• develop more sophisticated + detailed risk classification…
• …allowing for greater ability to select preferred risks
• drive better experience through monitoring
  
  • earlier identify changes in individual risks
  • being able to intervene/influence PH behaviour
• other data sources

Question 13

List some disadvantages of big data (5)

Answer 13

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 14

Analysis of new business

What is compared when performing an experience investigation which analyses new business? (1)

What is the purpose of new business analyses? (4)

Answer 14

When analysing new business the health insurer will…

• …compare/monitor sales against targets

Purpose

• Check strains caused by volume of new business sold against capital set aside for this purpose
• Check mix of business in each significant homogenous cohort against pricing assumption
• Check staffing levels (numbers, competence) against those required by business written
• Check commissions paid against those assumed

Question 15

Analysis of renewals

How might a health insurer review its experience of renewals? (2)

From what viewpoints will analysis of renewals be useful for? (3)

Under what circumstances are renewals quite important? (2)

Answer 15

Renewal experience should be reviewed for policies where renewal is an option eg PMI

• lapse rates will be compared with those assumed/used in assumptions
• analysis can be done by region, policy type, distribution channel

Such analyses will be important from the viewpoints of

• sales management,
• commission clawback, and
• marketing impact

The impact of lapses/renewals is quite important in terms of

• …profitability…
• …where pricing bases have amortised initial costs over a number of years of renewal.

Question 16

Mortality, sickness and claims incidence investigation: groupings

List the classifications/groupings by which data (both claims and exposed to risk) could be ideally sub-divided for the purpose of analysing the mortality, sickness, or claims incidence experience (10)

Answer 16

Most useful classifications would be (where relevant):

1. type of contract
2. benefit conditions (eg deferred period)
3. age
4. sex/gender
5. duration from policy inception
6. smoker/non-smoker status
7. underwriting status
8. source of business
9. occupation
10. location

Question 17

Mortality, sickness and claims incidence investigation: PMI and CI groupings

List additional factors by which data could be grouped/classified for the purpose of an experience investigation done on mortality, morbidity, claim incidence rates, and other contingent events

• for PMI contracts specifically (4)
• for CI contracts (2)

Answer 17

For PMI specific contracts, we can also consider

• cover option
• type of benefit
• amount of excess or co-payment level
• NDC level

For CI contracts, it would also be desirable to break the investigation down according to

• the various illnesses (cause of claim) involved

Question 18

Mortality, sickness and claims incidence investigation: general process

Briefly list the process of analysing experience related to mortality, morbidity, and claims incidence rates for healthcare insurance (10)

What considerations could be made when adjusting the claims data? (6)

Answer 18

Collect necessary actuals data - should be quality data

• accurate, volumous, consistent, useful to deduce trends

Group data according to groupings necessary

• retaining enough size per group

Create summary statistics

• analyse exposure​ and analyse claims

Adjust data where necessary

• base claims data likely to be incomplete, or unrepresentative due to delays in reporting and or processing

Consider the following when adjusting data

• …heterogeneity,
• unsettled, unreported, re-opened claims
• large/exceptional claims
• changes in types of claim
• changes in development patterns
• seasonality pattern of claims

Question 19

Mortality, sickness and claims incidence investigation: general process, summary stats

What is the most important principle to follow when analysing claims and exposure? (4)

Answer 19

Most important principle is that

• claims and exposure must correspond
• claims included in analysis must be related exactly to claims in the groupings that could have arisen, in terms of
  
  • periods,
  • policies

Question 20

Mortality, sickness and claims incidence investigation: general process, summary stats

As part of the analysis of mortality, morbidity, claims inception rates and other contingent factors, what kind of summary statistics could be created (hence analysed/compare to expected) for:

• LTCI contracts (5)
• PMI contracts (2)

Answer 20

LTCI

• calc exposed to risk per risk group, for each benefit level, for lives claiming and not claiming
• determine number of transitions per risk group
  
  • multiply appropriate exposed to risk by relevant transition rate (using ‘expected basis’)…
  • …for each transition of interest
• sum over all ages and compare against actual number observed transition of each type for the group

PMI

• since claims amnts variable, need to calc claims frequency and average claims amount per risk group and claim type
• for this, determine exposure, number of claims, and total claim amoutn per risk group and claim type

Question 21

Analysing claim amounts: intro

Under what circumstances/classes of business may claim amount experience be monitored, and what would be compared in this analysis? (2)

Answer 21

Claims experience can be analysed

• typically for classes of insurance where the claim amount is niether fixed nor rising according to an index.
• by comparing the amounts of claims incurred with those expected in each risk cell

Question 22

Analysing claim amounts: risk cells

According to what groupings/risk cells may claim amounts be grouped? (15)

Answer 22

Risk cells which can be used to group claim amounts

• procedeure performed (PMI), further split by
  
  • age-band, gender,
  • benefit option, chronic condition vs acute condition
  • treatment provider (eg nurse at primary clinic/specialist)
  • occupation
• distrbution channels, hospital chain, approved network
• for classes where the sum assured is chosen by proposer

Question 23

Analysing claim amounts: importance of claim increase trend

What particular aspect of claims might be of great importance when analysing claims experience (where claim amounts are not fixed nor rising with an index)? (5)

Answer 23

Of particular importance when analysing claims experience for such policies is that

• the absolute amount of the claims may not be as important as the trend of claim amount escalation/increase in relation
  
  • to standard inflationary index
  • to other market information
  • to other insurers in this class of business
• the trend gives an indication of overall claim cost experience
• analysis of claims incidence by sum insured groupings may reveal underwriting practices which encourage claims from higher sums insured

Question 24

Analysing claim amounts: fixed claim amounts

What kind of claims experience anlaysis can be done for contracts/classes of business where the sum insured is chosen by the proposer? (2)

What important information can be gleaned from analysing claims experience for classes of business where the sum insured is chosen by the proposer? (2)

Answer 24

In classes where the sum insured is chosen by the proposer

• a special analysis of incidence can be done…
• …split into broad categories of amounts of sums insured

Such analysis will provide information which is highly informative in monitoring

• …underwriting practices and possibly sales techniques
• eg analysis may reveal that underwriting and sales techniques are encouraging anti-selection from policyholders (higher claims arising from those choosing higher sums insured)

Question 25

Other important factors: intro

What other important factors should be considered when analysing experience?

Answer 25

• analysing trends
• dividing data to credible cell level
• comparisons to market experience
• competitor’s performance

Question 26

Other important factors: in depth, trends + data

What other important factors should be considered when analysing experience?

• analysing trends (5)
• dividing data to credible cell level (1)

Answer 26

Analysing Trends:

• use data to improve estimation of future experience.
• actuary will use insurance market intelligence and published population data. E.g. economic downturn can affect usage
• can also use data from reinsurer, competitors, similar contracts (if available)

Divide data to credible cell level:

• need to balance level of subdivision against adequacy of data for results

Question 27

Other important factors: in depth, market + competitors

What other important factors should be considered when analysing experience?

• comparisons to market experience (6)
• competitor’s performance (5)

Answer 27

Comparisons to market experience:

• competitor underwriting can cause own experience to deteriorate if they subdivid data by more rating factors
  
  • ie they underwrite more granularly, hence pick healthier lives
• analysis can present opportunities where
  
  • market hasn’t recognised key feature of a risk or a particular need
  • => more profitable experience from better segmentation and pricing
• should consider if risks inheren in own portfolio are significantly different to competitors

Competitors performance:

• important to keep close eye on what competitors do; consider competitor
  
  • risk selection,
  • policy coverage,
  • pricing,
  • business volumes,
  • methods of distribution

Question 28

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? (1)

Answer 28

Subdivision and analysis of persistency experience data would usually be by:

1. type of contract
   
   • long term contracts different persistency from PMI
2. duration in force
   
   • usually higher at start of contract
3. sales method
   
   • more suitable product sold => better persistency
4. target market
   
   • more suitable product sold => better persistency
5. frequency of premium
   
   • monthly prem=> more chance stop paying than annual prem
6. size of premium
   
   • big annual prem may be less affordable than smaller monthly prem
7. premium payment method
   
   • cash more ‘noticeable’…
   • ..debit order persistency > cash payment persistency
8. original term of contract
   
   • longer term->higher commitment-> higher withdrawal
9. gender and age
   
   • persistency usually worse for younger ages
10. Claims experience/NCD for PMI
    
    • good risks more likely to lapse than frequent claimers

The only first 3 are used as they are particularly important

Question 29

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

What impact would they have on the persistency analysis? (2)

Answer 29

External factors influencing persistency

• economic situation
• competitive situation of product
  
  • eg introducing more attractive product => may have an adverse effect
• perceived value of product to customer

Impact on analysis

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

Question 30

Outline how full withdrawal rates can be determined for each homogenous group of lives analysed (7)

Answer 30

• for each homogenous group
• divide contracts issued in company’s last financial year
  
  • into corresponding number that survive in-force until first policy anniversary
  • to give first-year persistency rate
• first year withdrawal rate = 1- first year persistency rate
• exclude deaths and maturities from calc (if material)
• repeat for subsequent years to obtain second-year, third year, etc withdrawal rates
  
  • by looking at number surviving from number of contracts, in each group, that have their first, second, etc policy anniversary in last financial year

Question 31

What 2 different ways may be used to determined persistency rates? (2)

What adjustments may need to be made to data? (6)

What other analysis may we consider regarding persistency? (2)

Answer 31

Persistency rates may either be determined

• over a period: number surviving period, compared to start of period
• cumulatively: number surviving to end of period, compared to number at contract inception

Adjustments may lead to regrouping of data

• if differences for rates due to small risk cell sizes
• exclude deaths and maturities where material
• time delay in information, which may present problems
  
  • eg lets say a policy was sold in Dec 2018, and we are looking for 1 year rates for all pols sold in 2018, only in Dec 2019 would the data include 1 year in force persistency data for the Dec 2018 policy (assuming still in force)
  • could instead use persistency over a quarter
• depending on what management wants to see

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 32

What is the point of an expense investigation? Why might an insurer perform an expense investigation? (7)

Answer 32

Point of an expense investigation is mainly concerned with allocating expenses correctly between classes and risk groups within insurer’s overall portfolio

• allows insurer to better understand its expenses and measure past performance of each portfolio
• allows insurer to quantify different elements of expenses/ total costs (such as salaries, systems) etc into initial, renewal, termination and investment costs per policy
  
  • to allow for in any future premium rating exercise
  • to revise expense assumptions/allocations where appropriate
• the allocation will need to assume that some policy costs are independent of policy premium size, some vary by premium size and some vary by benefit size.
• many assumptions some rather arbitrary and pragmatic, will be needed in allocating costs down to cells
• allows insurer to reconcile results with total expenses in published accounts

Question 33

What considerations should we consider when deciding how to group expenses? (3)

Answer 33

Consider desired end results through purpose of investigation

• contribution method
  
  • analyse expenses into policy groups so can apportion dividend per group
• asset shares
  
  • terminal bonuses/terminal dividends, or surrender values…
  • …historical expenses to be apportioned between different policy types
• pricing/reserving
  
  • essential for policy’s fair share of insurer costs are established, so correct premiums/charges can be levied

Question 34

What are the main categories according to which an insurer’s expenses can be split, and what do we mean by these? (2)

Why would we exclude commission expenses from the expense anlaysis groupings? (2)

List 4 further catergories into which non-commission expenses are split for the purpose of an expense analysis and within the above 4 splits, give 3 further subsplits (12)

Give 2 examples of expenses that are not proportional to number of contracts written or in force (2)

Answer 34

Direct vs overheads

• direct expenses are usually variable and can be directly attributed to a product or policy
• overheads are the balance of expenses, relating to general management and service departments which are not directly involved in new business or maintenance activities

May exlude commission from expense analysis groupings

• on basis that its format is known and can be added in later by a formula approach

For expense analysis we consider following 4 non-commisison expenses splits

• initial expenses (new business expenses),
  
  • non-proportional
  • proportional to
    
    • number of contracts written
    • amount of premium written
    • amount of benefit written
• renewal (maintenance) expenses,
  
  • non-proportional
  • proportional to
    
    • number of contracts in-force
    • amount of premium in-force
    • amount of benefit in-force
• termination expenses,
  
  • non-proportional
  • proportional to
    
    • number of contracts in-force
    • amount of premium in-force
    • amount of benefit in-force
• investment expenses

2 examples of expenses that are not proportional to number of contracts written or in force

• marketing expenses: may relate to amt intial comm paid
• underwriting expenses: mainly relate to benefit size

Question 35

Describe the division of expenses into cells

(4 main points, 6 subpoints)

Answer 35

• cells can be seperated by
  
  • whole business of the insurer
  • whole business of a particular accounting fund
  • each main product line of the insurer
• 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 36

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

Answer 36

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 37

Explain how to deal with commission expenses (1)

Answer 37

May exlude commission from expense analysis groupings on basis that its format is known and can be added in later by a formula approach

Question 38

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

Answer 38

• split into 3 groups
  
  1. staff whose work falls entirely within single analysis cell
  2. staff whose work falls within multiple analysis cells
  3. other staff eg catering staff
• treat as follows
  
  • Group 1 staff salaries allocated directly to appropriate cell
  • Group 2 staff salaries allocated across cells 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 39

Explain how to treat property costs in the expense analysis (3)

Answer 39

• if insurer owns any buildings it occupies (within long-term fund), notional rent is charged to relevant departments
• if company rents any buildings it occupies, actual rent is used
• this rent, plus property taxes, heating costs, etc can be:
  
  • split between departments, eg by floor space occupied, then
  • allocated in accordance with salaries in each department

Question 40

Explain how to treat computer costs (2) and investment costs (3) in the expense analysis

Answer 40

Computer costs

• costs of purchasing new computer could be amortised over its useful lifetime and then added to ongoing computer costs
• these can then be allocated according to computer usage

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

Question 41

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

Answer 41

• need to be amortised over expectd useful lifetime of item purchased
• amortised cost may then simply be treated as part of overheads
• if item can be treated as asset of lon-term fund (eg new head office building), ocst not amortised
  
  • instead, charge (eg notional rent) usually made
• exceptional items, not likely to recur, excluded completely from analysis

Question 42

Give an overall summary of the expense analysis (11)

Answer 42

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-off capital costs would be spread over the expected future lifetime of the item, then just treated as overhead
11. exceptional expenses may be ignored in analysis, but their future incidence may be allowed for in margins in future expense assumptions or risk discount rate
12. after reaching the end of the expense investigation, it would be normal to reconcile to the results (ie summing expenses for new, in-force and terminated policies over all policies) with the total expenses in published accounts

Question 43

Investment experience investigation (3)

Answer 43

• insurer will want to assess return it’s 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 distirbute 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 44

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

Answer 44

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

Question 45

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

Answer 45

• 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)

Question 46

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

Answer 46

1. validating EV calculations
2. reconciling EV results for successive years
3. providing management information
4. providing data for use in executive remuneration schemes
5. providing detailed information for publication in accounts, in particular value of new business taken on by company

Question 47

List items of management information yielded by an analysis of changes in the EV (6)

Answer 47

1. value of new business written, normally by product
2. amount of any expense profit or loss
3. amount of any mortality profit or loss
4. amount of any withdrawal profit or loss
5. impact on free assets on EV growth (ie whether spared capital being used effeciently)
6. impact of supervisory minimum solvency capital requirements on rate of return achieved

Question 48

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

Answer 48

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 49

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 49

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