Chapter 31: Monitoring experience

Question 1

List 4 reasons for monitoring experience

Answer 1

develop earned asset share

update assumptions as to future experience

monitor any adverse trends in experiences so as to take corrective actions (eg, change underwriting/ reinsurance/ pricing/ investment strategy)

provide management information to aid business decisions

Question 2

There is a basic requirement for a reasonable volume of stable, consistent data

What are examples of inconsistent data?

Answer 2

different definitions for smoker status/ age

Question 3

List factors for subdividing mortality/ morbidity experience

Answer 3

age bands,
gender,
smoker status,
medical status,
distribution channel, duration in-force

Question 4

List factors for subdividing persistency experience

Answer 4

duration in-force,
distribution channel,
premium payment method/ size/ frequency,
original term of contract, gender,
age bands

Question 5

Explain how the required cells for an expense allocation investigation are derived

Answer 5

commission normally excluded on the basis that its format is known - therefore can be explicitly allowed for in the pricing basis

non-commission expenses can be split into the following (by department or function): initial, renewal, termination and investment expenses

initial, renewal and termination expenses can further be split according to whether expense is proportional to: number of contracts written or in force (most common), amount of premium/ benefit written or in force

investment expenses (investment department) normally treated as a deduction from earned investment return

expenses can be split further into the required cells: based on main product lines of the company/ regular vs single premium business

The per policy costs (for each main product line/ regular vs single premium business) are determined as the sum of: Initial expenses divided by the number of new policies, Renewal expenses divided by the number of in-force policies, Termination expenses divided by the number of policies terminating, Appropriate allowance for overheads (based on expected business volumes)

Question 6

What are the main expense items for an insurer?

Explain how expenses are allocated in an expense allocation investigation

Answer 6

main expense items: salaries and salary-related expenses,
property expenses,
computer expenses,
investment expenses,
one-off capital costs

staff whose work comes entirely within a single cell - expenses can be directly allocated to the appropriate cell
staff whose work comes within more than one cell - staff timesheets can be used to split expenses between the appropriate cells
other staff with direct expenses and overheads associated with such staff- direct expenses can be split in proportion to group (i) and (ii) staff expenses. overheads can be split in proportion to the direct expenses

if insurer owns any of the buildings it occupies (treated as an asset of long-term fund), a notional rent needs to be charged to the relevant department/ function
notional rent + heating, lighting, cleaning expenses etc can then be split by floor space occupied by department/ function - and then allocated in proportion to salaries and salary-related expenses

expenses of purchasing a new computer can be amortised over its useful lifetime, and then be allocated to cell(s) according to computer usage

one-off capital costs should be amortised over its useful lifetime and then simply be treated as overhead
if item can be treated as an asset of the long-term fund (eg new head office) then the cost should not be amortised, instead a charge (eg notional rent) should be made
exceptional items unlikely to recur, should be excluded completely from the analysis

Question 7

list thepurposesformonitoring new business

Answer 7

important to monitor:

new business strain
business mix and volume against pricing assumptions
commission
staffing levels in terms of numbers and competence against those required by new business