Chapter 30 Monitoring & feedback into the control cycle Flashcards

Question

Other important factors: intro What other important factors should be considered when analysing experience?

Answer 1

* analysing trends * dividing data to credible cell level * comparisons to market experience * competitor's performance

Answer 2

**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

Answer 3

**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

Answer 4

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**

Answer 5

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

Answer 6

* 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

Answer 7

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

Answer 8

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

Answer 9

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

Answer 10

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

Answer 11

* 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

Answer 12

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)

Answer 13

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

Answer 14

* 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)

Answer 15

* 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

Answer 16

**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

Answer 17

* 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

Answer 18

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

Answer 19

* 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

Answer 20

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**

Answer 21

* 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)

Answer 22

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

Answer 23

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

Answer 24

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

Answer 25

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